Brad Simpson: Some investors fought the Fed, and the Fed won

Douglas Rissing

Greg Bonnell

My next guest says that recent bond and stock market volatility suggests that investors may have been trying to fight the Fed. And they are losing. And that leads to some volatility there. Brad Simpson, Head of Heritage Strategist at TD Wealth Management. Brad, great to see you back on the program.

Brad Simpson

Great to be here. Thanks.

Greg Bonnell

OK. So let’s talk about this whole thing about fighting the Fed. Because we had this summer rally. And I think a lot of people are trying to figure that out. Say, wait a minute. The Fed tells us one thing. Why is the market doing this?

Brad Simpson

Yeah. I actually think it’s one of the most remarkable things I’ve ever seen on the market. And if we look, we’ve seen some pretty remarkable things over the years. But that’s the only thing we could really count on is that this adage really rings true. And if you step back for a minute and look at what’s happening in July and early August, we had interest rates, 10-year treasuries, starting to come down. Stock markets begin to rise. And then if you look at the financial conditions index, both stocks and bonds, we’ve seen conditions ease. And if you’re a central banker, I mean, here are the three things you didn’t want to see. You didn’t want to see rates go down. You didn’t want to see the markets go up. And you certainly didn’t want to see through the traditional and shadow banking system that the money was flying in there. And I think that has a lot to do with a fool believing what he wants to believe. And we’re so used and so addicted to the Central Bank coming to the rescue, that now it’s to the point where we just can’t believe it’s going to happen. How do they really think? And I think what we’re seeing right now is that – we’ve been writing and talking about this all summer. And to go is an aberration. Trust me. This is not going to continue. And now that we are halfway through August, I think the light bulb has really started to light up. So, and I think people are waking up again very clearly, there’s no pivot coming any time soon.

Greg Bonnell

Was the lightbulb event Jackson Hole? It just seemed to be very… I think it lasted maybe seven or eight minutes. But it was very severe. Right. Not that I expect a central banker to be a laughing man. He kind of came out and just said this, this, this. And then left.

Brad Simpson

Yeah. I think it’s– and even if you look at what happened in the following days. And if you go even before Jackson Hole, if you read the papers, and read the reviews, and all that, it’s going to be Jackson Hole. It will be calm. And it might be one of the least important Jackson Holes we’ve had in a long time. And I actually think there’s a coordinated campaign going on by the central bankers right now. Powell came to this. It was incredibly clear in the days that followed, you saw the governor of the feds bank after the governor of the feds bank came out and basically said the exact same thing. This inflation is bad. That there is no pivot to come. And we’re going to keep fighting this thing. And then of course you sell the ECB at 75 basis points today. Said exactly I mean, exactly word for word almost what I said. Bank of Canada than the day before. And so yes. I think what’s going to be interesting to see is that I’m not sure everyone is going to continue. Ah OK. They thought so for a while. If you don’t need a sign that we’re in regime change, we’re not in regime change. Period. And we have to start thinking about it that way.

Greg Bonnell

As you said, we’re so used to central banks coming to the rescue. There was even a time when investors could throw a fit. And the Central Bank would say, well, we heard you. We will back down. It won’t happen this time. If they are categorical. If they want to stay the course. What does this environment look like for investors? And how long are we going to be on this kind of diet to say we have to inflict pain. We know it’s going to be painful. But that’s just what we have to do.

Brad Simpson

I think the short story is I think the first sight was when we were going when things started to open up again that it would take a few quarters, and we’re going to get through that. I think that today, it really works in two camps. And I think maybe the best way to oscillate between those two camps is that a consensus is that we’ll sort this out in the next three or four quarters. We will kind of miraculously have a mild recession. Thread this eye of the needle. And then, if that was the case, then equity markets and fixed income markets are probably in a pretty reasonable position if any of this rings true. The other side, the other side, would suggest that this is going to be much longer and more difficult than originally thought. And I think kind of a key here, I think, for investors is — that’s probably going to be a key theme that we’re going to come back to several times here today. Do I think we need – and the answer to where we are is it’s going to be a process to get that back to where we need to be. And that’s what often happens in the markets when there’s a lot of liquidity and a lot of movement and a lot of momentum, what makes the market move is a lot of speculators and a lot of quantitative traders who make things happen. It’s a world you want to be an investor in today. And so that changes your dynamic. This is a very tough trading market. And so I think increasingly, if you want to figure out what economic environment we’re in, I can show you a chart that will make your point in any way. want it to be.

Greg Bonnell

Make the numbers dance the way you want them to dance.

Brad Simpson

Because there is so much incredibly conflicting data out there. And these contradictory data, it’s always really, really difficult to frame where we are in the present. This one is especially difficult because there’s really all this choice of dataset you want, and you can kind of build a story around it.

Greg Bonnell

So we’re in a situation right now where the central bankers are basically saying, take the hard medicine. We know it tastes bad. And we don’t like it, but it’ll provide the cure. So, in the end, are we convinced that central banks will control inflation? That they’re going to bring him down?

Brad Simpson

Yeah. Yeah. Yeah. And I think there are several reasons for this. I mean, I’m still in camp that we sometimes have this tendency to make things so big that– if you go back, and you look at the last year and a half, and just look at the money supply– look at M2. I mean, it absolutely J-curves towards the moon. And then somehow, oh, how did inflation happen? Well, I think that was pretty clear. And then once you look at that and say you’re giving people a lot of extra pocket money, and very low interest rates, and a lot of free time, you’re going to have a pretty active economy. And that’s what we saw. And so this step that you have to look at is that there are a lot of examples that you can look at. You see that manufacturing is starting to slow down. The cost of food. I know we’re still, and I know we talked a bit this last time, but it’s starting to pass. And you see when… it’s always a little surprising when you’re at the grocery store. But it’s not that surprising because basic food costs are falling. When you pass a gas station and look up, the price of gas has gone down. And so we’re at that number at 10. And what we’ve said is that going from 10 to 5, that’s what we’re doing. And all things being equal, it happens. And we are in the middle of it. And in no time, we should get there. That shift then, from five to two and three, that’s where the sticky stuff is going to be that we’re going to have to work on. And I think the determining factor if we really want to monitor this is sort of twofold. What is the housing on one side. Labor market on the other side. And those two things are going to tell you how quickly we’re going to whittle it down to those two or three. And it’s likely a story of your fourth quarter 23 going to 24 is really when you’re most likely to work out a lot of that. So it’s still a long way off.


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Robert D. Coleman