The last full trading week of the year is going to be really busy! Today, the UK GDP monthly estimate is published. Tuesday will be a huge number in the CPI (Consumer Price Index) from the Bureau of Labor Statistics. Then the Federal Open Market Committee (FOMC) will announce on Wednesday their decision on interest rates. This is of course the most important information of the week, and everyone will be waiting on pins and needles. On Thursday the Bank of England and European Central Bank will be making announcements on their interest rates. The market is anticipating that all three banks will be coordinated in raising their short-term rates by .50% rather than the .75% that all three of them did at their last meetings.
The consensus is that the headline CPI number on Tuesday will print 7.3% - so any number higher than this will be bearish bonds and stocks as the anticipation will be more interest rates rises. Conversely, if the CPI print comes in lower than 7.3% asset markets should respond positively with the assumption being that the Fed won’t have to raise rates much more as inflation is abating. We don’t subscribe to the idea that the Feds interest rises are a one-to-one correlation to lower inflation. There are many supply chain issues that are still affecting the economy adversely and the basic premise of supply and demand makes prices higher when supply is lower. There are a number of deflationary forces building – so we’ll see what the Fed has to say going forward. They will probably leave the door open for a .50% interest rate hike at their February meeting – we will see.
The yield curve is still inverted and as you can see from this chart, this sort of inversion has been an indicator of a pending recession – every single time since 1980...
We are not prepared to say, “but it’s different this time” and declare that we won’t have a recession. That being said – history rhymes rather than repeats and we can’t predict what sort of economic slowdown is in the cards. If crude oil is any indicator, things are slowing down and there are certainly other similar factors going on – but there are many conflicting indicators so we will have to wait and see…
On a completely separate note, the Bank of England is supposedly going to test run a digital currency in the near future. This is just one plan among many within the world’s central banks. The BOE is stating that if/when they do this, the digital British Pound will be run alongside of the current Pound rather than replacing it. We would be surprised if any of the central banks push this digital currency strategy too hard in the very near term. However, we do expect these CBDCs to be utilized if we have any sort of a financial market crisis – so stay tuned. We are not fans of the CBDC strategy because, by our estimation this would centralize WAY too much power. Imagine a digital dollar that the originator of (The Fed) could turn on or off at their discretion – or there could be an expiration date on the digital money. The digital money could be programmed to be usable only in predefined ways. For example, maybe alcohol or cigarettes couldn’t be purchased with the digital money. All of this might start under the auspices of stopping money laundering, protecting people’s health, keeping social order, etc. Governments all around the world for all of history don’t have a good track record of not expanding any power they are granted. This could turn into quite a totalitarian control of our lives if the CBDCs are implemented. Again, we don’t see this happening anytime soon, but we need to keep it on the radar. In the meantime, let’s keep our economic freedom in-tact. We use cash only on Fridays and are suggesting everyone do the same. As long as there is the anonymity of using cash currency available to us, no one can dominate our lives from above – at least from the financial perspective.
Regards and good investing,