Asks why bond investors are in a bunker mentality while stock investors are out having fun.
Speaker1
Mike Schumacher
Bond investors are spooked because the Fed's next move is a complete unknown—it could be a hike or a cut. This makes it a bad environment to buy short-term Treasuries.
Asks why stock investors don't care that the Fed's next move is a coin toss.
Speaker1
Mike Schumacher
Equity investors may see inflation as supportive for earnings, which typically do well in inflationary environments. Bonds lack this support, explaining the disconnect.
Questions if the Fed even matters now, noting the market has been raising rates via weak auctions and high mortgage rates.
Speaker1
Mike Schumacher
The Fed always matters, but it is currently stuck and on hold. With a new chairman coming in, it's difficult to imagine them doing anything different for a while.
Asks about the backdrop of a potential stagflationary environment with a weakening labor market, high rates, and high input costs, and what it means for equities.
Speaker1
Mike Schumacher
Stagflation would be terrible for risk assets and not good for fixed income, but we are not there yet. High inflation will persist, and the risk of full-blown stagflation is another quarter or two away.
Seeks a definitional threshold for stagflation: what level of growth avoids 'stag' but keeps 'flation'? Suggests sub-1% growth.
Speaker1
Mike Schumacher
Anything below 1% growth in the US would be pretty grim for the outlook ahead, even if not negative.
Asks what the Fed can do given no good choices and no tools for a supply shock, and for a historical comparison to the current situation.
Speaker1
Mike Schumacher
The Fed's best choice is to sit and wait, get more data, and keep liquidity in the system (e.g., buying T-bills). There is no great historical comparator; the situation is unique and unclear, requiring another month or two to see direction.