Money Printing and Dealing with Inflation! Where to Stop?

Now that Governments have discovered QE (money printing) do we really think they will put this tool back in the box & never use it again? I don’t. Nor does Fed Chairman Powell. As I’ve mentioned before, in a testimony to congress earlier in 2022, he was asked what the Fed’s response would be to the next proper recession? He instantly replied, “Asset purchases” – which means printing money to buy up primarily Government debt. Which brings interest rates right down again, and enables Governments to run big deficits, funded by money-printing.

So how long will it be, before the Fed cracks, and starts reversing its current tightening policy? I’ve never believed that Quantitative Easing would be unwound, as that’s a pretty much guaranteed way to push the economy into a recession. That’s electoral suicide for politicians.

Based off of a historic composite, here is how the major events of 2023 could unfold:

• Fed stops hiking now and pauses for 7 months (Summer 23).
• Recession begins around Nov 23.
• S&P makes an ultimate low early 24.
• Earnings bottom in spring 24.
• Recession ends late-summer 24.

The research above by 3Fourteen Research is not a prediction for 23, but rather a starting point to determine how and why this cycle could deviate from the historic script. Things often take much longer than one thinks they should to cascade through the economy/markets. Such a long drawn out affair would definitely reset stock valuations.

It’ll be fascinating to see how all this works out.

It still seems odd to me, that to deal with inflation caused by external supply problems, central banks are now inducing a recession. Sure, that stifles demand, and scrubs off asset bubbles, but the markets/inflation are already doing that job. So, do central banks actually need to tighten much more?

There’s continuing inflation (especially food) in the pipeline, but are oil & other commodities likely to continue rising in price as demand falls? I’m looking through commodity prices now, and many have fallen back a lot from the peaks. So surely the cure for inflation is already starting? If oil stays down, and supply chains normalise, then we could see inflation easing at some point in 2023, at a guess?

You could argue that a softer labour market is also needed, to reduce wage inflation pressures. That’s a nasty process though, with weaker companies going bust, freeing up labour, and reducing the bargaining power of staff.

Although I also understand the argument that such elevated inflation means central banks have no option than to raise rates, to stifle demand. It’s a very blunt tool.

My hope is that as economies slow due to reduced consumer demand, as households focus on essentials, which are costing so much more (especially petrol/diesel, household utilities, and food), then that should do the job for the Fed, in reducing demand for other things, thus reducing prices as companies are forced to discount.

There’s also the issue of excess inventories, as many companies have built up inventories to be sure of meeting demand, at a time of supply disruption. That’s already led to some US big retailers saying they’re over-stocked, and are now cutting prices.

It all looks horrendous for company profit margins, so profit warnings galore in the short term anyway seem likely, especially for companies with modest pricing power, and no particular product differentiation. But that’s why share prices have fallen so much – the market is anticipating profit warnings. Maybe not enough though, I reckon profits could be really clobbered at some weaker companies, or even push them into losses & insolvency?  So, I’ll be re-doubling my efforts on balance sheet warnings, and scrutinising debt more closely than ever.