A recession is not desired, it's required
Large rate cuts are priced in, but this might mean stocks are mispriced. Inflation falls below 5%. The first real recession in 15 years.
We sat down with Andy Constan to discuss markets, Fed, and the economy, but I was left slightly bewildered by how calmly Andy expressed the simple intent of tightening: a recession is not desired by the Fed to slow inflation, it’s required.
In this conversation, we discussed how this recession will impact asset prices and why the Fed is specifically trying to harm bank profitability. Many of the topics are worth an elaboration, and they also elicited increased personal conviction that the sun is setting on this economic cycle. It’s time to start saying goodnight.
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Behind the scenes
Whenever we have the pleasure of interviewing a razor sharp thinker like Andy Constan, it is our job to posit questions and some theories, and then listen. The conversation is likely to remain elevated if we let the expert expand on his or her theories, and actively debating the opinion of the guest would run counterproductive to extracting the full thesis and supporting arguments.
Instead, we took his comments, ran them through our own analysis, and provided you an instant reaction that can compliment and enhance your consumption of the interview. Today’s post goes through several of Andy’s core arguments, dissects them, and spits out several of our own both complimentary and counter points.
Cut expectations are wrong
First on Andy’s agenda was to establish that the market is wrong in believing that cuts will soon follow hikes. He believes that a lengthy pause is the most likely outcome. We learned today from the Wall Street Journal’s Nick Timiraos that a ‘summer break’ from rate hikes lies ahead for the FOMC, with a June and July hiatus from rate moves before reassessing in September the path for the policy rate:
Yes, we realize Timiraos is not on the FOMC. And yes, we also realize that articles like this move the needle for the Fed and can be taken at face value alongside price action—in this case, the odds of a June hike moved promptly to zero, where it shall likely stay.
Andy tells us that cuts are not coming, and this pause could be here with us for a very long time. While we are sympathetic, all eyes should be on the September time window—will four months of credit contraction, disinflation, and increase in unemployment be enough to force the Fed to cut rates?
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