Sorting out the data…what does it mean? When you listen to all the pundits talking on the various business channels, one usually ends up with nothing but confusion as to what is going on and more importantly asking yourself the question....
"What should I do?"
For what it's worth here is my take having been around this mulberry bush many times over the past five decades or so. Feel free to take it or leave it or comment positively or negatively.
1......as a rule since The Fed started in 1914 they have pretty much gotten it wrong every time and it generally ends up creating wider swings than if they just left well enough alone. This time around they are doing the same. They originally said that inflation was transitory and they would wait. As time went in this changed and they have been forced to increase interest rates by more than they said earlier.
2.....in the US the latest print for the PPI is 11% and so the seeds for higher inflation for the CPI is already in the mix. The bottom line is that as long as the interest rate is below the inflation rate the Fed policy is expansionary/inflationary NOT deflationary. So when combined with Point 1, interest rates will need to go up a lot more. All this is like the 1970s leading to Volker's high interest rates in the early 80s....we could well see Volker 2.0 sometime in the next year.
3.....initially in the US we will see a trap that people need to be aware of. For a while, unlike most interest hikes leading to a recession where we see the unemployment rate increasing, we won't see that this time around. This will lead the market and pundits to say " Everything is good". Hence the trap. The reason we won't see it at first is that in the US the job vacancy rate is about double the unemployment rate. So as The Fed increases interest rates the initial effect will be a reduction in the job vacancy rate not unemployment. The market will think we are seeing a soft landing and will rally for awhile but this will be a false signal because as The Fed keeps increasing interest rates to match inflation, unemployment will skyrocket and the market will have a huge sell off.
4.....the reality is that the market and people in general think that the Fed with all its sophisticated models can predict accurately the future. New Flash....they can't.
So what is the key metric to keep an eye on?
The answer is simple and easy. Keep track of the real interest rates. As long as interest rates are well below the inflation rate and in particular the PPI then the direction arrow for the market will be down and staying safe and holding cash will be the way to go. Once the interest rates reach the inflation rate then it is time to back up the truck and start buying.
Right now that metric is way out whack. The delta between the federal funds rate and the rate of inflation is huge and so there is room for many more interest rate increases ahead.