All investors were optimistically awaiting the meeting of central bankers that would take place at the end of August in the idyllic setting of Jackson Hole, in the USA. During the weeks prior to the meeting, the stock markets had recovered a significant part of the falls recorded during the first half of this year. One of the main reasons for this optimistic behavior resided in the thesis that the turning point of the Federal Reserve was near, that is, that there was not much left to see the ceiling of the increases in interest rates in the US, and that in 2023 we would begin to experience a new cycle of lowering the cost of money. This is what happens when you educate the investor for almost two decades in the belief that the equilibrium level of interest rates is 0%, and that any problem that arises in the markets can be solved by printing money out of thin air and flooding the system with liquidity. Along the way, you also generate the perverse effect of inviting citizens, companies and governments to get into debt because the real cost of that debt is negative, that is, the interest rate is lower than inflation. And due to this suicidal policy, we now find ourselves with a level of global debt that already exceeds 300 trillion dollars, or to better understand it, 260% of debt with respect to the size of the world economy.
Some will say that debt is not bad, and I agree, only clarifying that “productive debt is not bad”, that is, that debt that one assumes to invest in a project that generates a return greater than the cost of that debt. same debt. The problem is that we have spent more than a decade and a half making unproductive debt grow, that which does not generate greater productivity and, therefore, greater economic growth, but simple and mere speculation.
For a few months we have been discovering the price that must be paid for this ultra-expansive monetary and fiscal policy: runaway inflation like the one experienced 40 years ago. We wanted to avoid the negative effects of the pandemic in 2020 despite the fact that it caused one of the worst recessions of the last century, but perhaps the only thing we achieved was delaying the inevitable, because like it or not, crises have to be overcome, like the flu , and they are always very harsh and destroy part of the business fabric and part of the welfare of society.
Today, both companies and citizens are suffering from the loss of purchasing power of our money at a rate that we did not think possible. And to fix this immense problem we are going to have to suffer even more, because the central banks, those that for many years convinced us that 0% money was something normal, and that later, in order not to change their way of thinking , said that inflation was transitory, they come to us now with the need to prepare for a potential economic recession caused by the necessary rise in interest rates to combat inflationary pressures.
The conclusion that one can draw from the Jackson Hole meeting of the central banks is clear: “this has only just begun”. Fed Chairman Jerome Powell poured cold water on optimistic investor expectations when he began referencing what his predecessor Paul Volcker had to do in the 1980s. He made it clear that rates will continue to rise, probably until approaching 4% and that, contrary to what the market thought, they will remain not far from that level throughout next year. And in case anyone still did not get the idea, he said that the economy had not yet felt the effects of the rate hikes that have already been made since March, and that it will cause damage to both citizens and companies.
Rarely has such a direct and unfiltered message been heard from the Federal Reserve in recent decades. For its part, the European Central Bank, through its member, Villeroy, recognized that when one is as wrong as they have been in the ECB regarding the evolution of inflation, it has serious consequences. He said that it will take getting used to a much tighter monetary policy than is remembered, and that it is likely to cause a recession in the euro zone.
Investors are looking with increasing concern at the economic situation that is coming, but they do not finish acting, it is as if they were paralyzed before a vehicle that is heading towards them at full speed, but they are not able to get out of the way. I say this because despite the economic deterioration, the energy crisis, inflation rates, geopolitical conflicts and the tightening of monetary conditions that central bank presidents warn us about, volatility and other quoted risk measures show no signs panicked, as if the reality of what was to come was just a bad dream.
Hopefully it’s me having a nightmare and waking up tomorrow thinking it was all just my imagination, because if it isn’t, I’m afraid we have some really tough quarters ahead of us.
Paul Gil is a market strategist at XTB
All investors were optimistically awaiting the meeting of central bankers that would take place at the end of August in the idyllic setting of Jackson Hole, in the US. During the weeks prior to the meeting, the stock markets had recovered a significant part of the falls recorded during the first half of this year. One of the main reasons for this optimistic behavior resided in the thesis that the turning point of the Federal Reserve was near, that is, that there was not much left to see the ceiling of the increases in interest rates in the US, and that in 2023 we would begin to experience a new cycle of lowering the cost of money. This is what happens when you educate the investor for almost two decades in the belief that the equilibrium level of interest rates is 0%, and that any problem that arises in the markets can be solved by printing money out of thin air and flooding the system with liquidity. Along the way, you also generate the perverse effect of inviting citizens, companies and governments to get into debt because the real cost of that debt is negative, that is, the interest rate is lower than inflation. And due to this suicidal policy, we now find ourselves with a level of global debt that already exceeds 300 trillion dollars, or to better understand it, 260% of debt with respect to the size of the world economy.
Some will say that debt is not bad, and I agree, only clarifying that “productive debt is not bad”, that is, that debt that one assumes to invest in a project that generates a return greater than the cost of that debt. same debt. The problem is that we have spent more than a decade and a half making unproductive debt grow, that which does not generate greater productivity and, therefore, greater economic growth, but simple and mere speculation.
For a few months we have been discovering the price that must be paid for this ultra-expansive monetary and fiscal policy: runaway inflation like the one experienced 40 years ago. We wanted to avoid the negative effects of the pandemic in 2020 despite the fact that it caused one of the worst recessions of the last century, but perhaps the only thing we achieved was delaying the inevitable, because like it or not, crises have to be overcome, like the flu , and they are always very harsh and destroy part of the business fabric and part of the welfare of society.
Today, both companies and citizens are suffering from the loss of purchasing power of our money at a rate that we did not think possible. And to fix this immense problem we are going to have to suffer even more, because the central banks, those that for many years convinced us that 0% money was something normal, and that later, in order not to change their way of thinking , said that inflation was transitory, they come to us now with the need to prepare for a potential economic recession caused by the necessary rise in interest rates to combat inflationary pressures.
The conclusion that one can draw from the Jackson Hole meeting of the central banks is clear: “this has only just begun”. Fed Chairman Jerome Powell poured cold water on optimistic investor expectations when he began referencing what his predecessor Paul Volcker had to do in the 1980s. He made it clear that rates will continue to rise, probably until approaching 4% and that, contrary to what the market thought, they will remain not far from that level throughout next year. And in case anyone still did not get the idea, he said that the economy had not yet felt the effects of the rate hikes that have already been made since March, and that it will cause damage to both citizens and companies.
Rarely has such a direct and unfiltered message been heard from the Federal Reserve in recent decades. For its part, the European Central Bank, through its member, Villeroy, recognized that when one is as wrong as they have been in the ECB regarding the evolution of inflation, it has serious consequences. He said that it will take getting used to a much tighter monetary policy than is remembered, and that it is likely to cause a recession in the euro zone.
Investors are looking with increasing concern at the economic situation that is coming, but they do not finish acting, it is as if they were paralyzed before a vehicle that is heading towards them at full speed, but they are not able to get out of the way. I say this because despite the economic deterioration, the energy crisis, inflation rates, geopolitical conflicts and the tightening of monetary conditions that central bank presidents warn us about, volatility and other quoted risk measures show no signs panicked, as if the reality of what was to come was just a bad dream.
Hopefully it’s me having a nightmare and waking up tomorrow thinking it was all just my imagination, because if it isn’t, I’m afraid we have some really tough quarters ahead of us.