The Russian invasion of Ukraine has completely changed the market dynamics. In his podcast, Peter talked about the impact the situation is having on the markets and the global economy. He also looked ahead, saying Russia can now serve as a convenient excuse for the Fed to back off its planned monetary tightening. Of course, that will have consequences of its own.
Last week, there was optimism in the markets that the economic fallout from Russia’s invasion of Ukraine wouldn’t be too bad. The trends that were in place before the invasion remained in place. But that shifted over the weekend with the US imposing far more harsh sanctions, including cutting off select Russian banks from the SWIFT system.
Of course, this has had a significant impact on the Russian economy. But it is also rippling through the global economy, hurting any company with any relationship with Russia.
Before the invasion, there was a rotation in the stock market. Investors were moving out of speculative momentum stocks and into value-oriented businesses that generate earnings and pay dividends. This was due to high inflation and the rising interest rate environment. Peter said what we’re seeing now is a correction in that trend. But he doesn’t think the trend is over.
While stock prices have gotten hammered. Commodity prices continue to rise. Oil rose above $101 a barrel on Tuesday.
Gold has inched higher but hasn’t broken out. That led to some criticism of the yellow metal. Critics say the fact that it hasn’t gone much higher proves that gold is losing relevance. It’s no longer a safe haven or an inflation hedge. Peter called this “a gift-horse gold-buying opportunity.
This is like a deer in a headlight. The price of gold, I think, is going to move in a major way. The only question is what’s the catalyst that’s going to spark the rise? But it is coming. And it is coming soon. And the people who are questioning why gold is not going up should just be buying gold right now with both hands.”
Looking at the broader economy, Peter said he thinks it’s pretty clear the US is heading toward a recession.
So, how will all of this impact Fed monetary policy? The markets seem to think the central bank will pivot back to a more dovish stance. In fact, they have already priced out two of the projected rate hikes for this year.
As the market is backing rate hikes out of its expectations – and I believe more hikes are going to get backed out as the situation continues to get worse for the global economy – that is also what is behind this correction in that trend where people are selling these real businesses that have real earnings that are impacted by Russian connections and a weakening economy, and they’re moving money back into the broken down momentum stocks.”
These tech companies don’t tend to be as connected to Russia. More significantly, people think they will go back up because the Fed is not going to hike as much as war originally anticipated.
Peter called the Russian invasion the latest variant that the Fed will use as an excuse to ease monetary policy.
First, we have COVID. Then we had the delta variant. And then we had omicron. The world is really getting tired of COVID. It’s COVIDed out. But the Fed needs another excuse. So, if it’s not going to be COVID, what’s it going to be? And Russia is the gift from heaven. This is exactly what the Fed needed.”
Peter said the Fed needed a way to save face. It needed a way to dial back the expectations of all these rate hikes. Or maybe even an excuse not to hike rates at all.
If it’s clear the US economy is headed to, or is already in recession by mid-March, will the Fed actually pull the trigger on rates? Will the Fed deliberately make a recession worse with rate hikes? Because if Americans are already struggling with surging energy prices and surging food prices, does the Fed really want to increase the burden with rising interest rates?”
A Fed rate hike would impact interest rates throughout the economy. It would push up mortgage rates, credit card rates and auto loan rates. That means more pain for the consumer.
That is a reason the Fed may not hike at all. Or if it does hike, it may indicate to the market that it’s one-and-done for a while. That it’s data-dependent. That it wants to see how the markets absorb that hike before it delivers another one. And, I think it’s the anticipation of this easing of monetary policy that is blowing some air back into these deflating tech bubbles.”
Peter said he doesn’t think easing monetary policy is going to work this time.
It may create a small rally, but it’s not sending the markets to new highs like we had under COVID because this time it really is different because we have a huge inflation problem that the markets can’t ignore.”
Central bankers and government officials have a new scapegoat for inflation – Russia. They will blame further price increases on the invasion.
It’s going to be an excuse to allow rising inflation. Just like they claimed it was transitory because of supply chain bottlenecks, well, now they can pull that transitory card out again. Only this time it’s because of Russia. The supply chain problems are now because of Russia and the Ukraine. It has nothing to do with the Fed. It’s got nothing to do with monetary policy. In fact, the Fed needs a more expansionary monetary policy to counteract the damage being done to the economy.”
Peter said he thinks the next step could be price controls and rationing.
I don’t see the Fed doing what Paul Volker did in the 1980s — not in the vulnerable position the US economy is now in. And that is why it’s different this time.”
Peter said we are at the end of our rope.