Before I get to Dr. Bernanke's remarks... One thing that became very clear after hearing from some of the brightest minds in financial markets is this: No One has All the Answers. There are so many moving pieces in our current environment that most pundits are hesitant to give their outlook, given how wrong everyone has been to date. This is completely normal. When all ships are rising and everyone is making money, they all have a viewpoint. It’s what people do…When things go south and optimism is sucked out of the market, opinion blogs go silent. From here, the one thing that was reiterated at the meeting, and is true in this part of the economic cycle, it seems like forward returns are starting to look very attractive given today's environment. Now with all that being said, here is Ben’s take on the past 2-3 years and the Future….
Throughout the pandemic, you had tremendous amounts of liquidity pumped into the system. The Fed cut rates to 0, sent money out to those in need, and bought all sorts of debt instruments as markets cratered. As markets recovered, you saw demand for goods and services increase, and the supply for these items was not able to keep up. Homes, Energy, Food, Oil, Goods, Building Supplies, Cars, Technology… You name it and there was a supply shortage. This led to the stickiest inflation we’ve seen since the 1970s. Dr. Bernanke reiterated that everyone got inflation wrong. From those that used the words transitory, temporary, or even persistent. They all got it wrong... No one saw inflation this bad. As a result of this miscalculation, you saw inflation expectations pick up which led to higher interest rates and a mini-taper tantrum in March. In short, it got ugly….real ugly.
Acting as he should and following the Fed’s prime mandate (price stability) current Chair Powell then came out and emphasized that he was not going to let inflation get away from them, but he felt comfortable with letting it run above 2% for a bit because we have been below target for so long. This is an important distinction because it now sets the Fed’s reaction function above what it has been historically which could mean more volatility in markets going forward as we all try and handicap how tight monetary policy will be relative to historical norms.
What does this mean for investors?
While there are a lot of unknowns, we do know that rates are going to be higher than they have been over the last decade. Inflation will likely run above 2% for some time as we play catch up. The direct result of being below target for so long. Combine those two factors and it is likely we see higher volatility in markets and potentially more frequent 10% corrections like we saw earlier this month. No one has a perfect crystal ball, but if you have an investment plan that can weather these storms, you will be better off than most investors who don’t have a plan or simply follow whatever everyone else is doing. Forward long-term return expectations for bonds and equities are starting to look like attractive opportunities, but the road to get there may very well be bumpy. In our opinion, the giant financial reset is well underway. As it plays out, we feel more than a little excited about the future.
In summary, it was great to hear from Dr. Ben Bernanke. It’s not very often one can be in the room and hear directly from a generational icon in the field. From my perspective, no one has all the answers in this market environment, but understanding how different policymakers view inflation and interest rates is critical for investors as we try to navigate these choppy waters.
Heading into the year-end, please don’t hesitate to reach out if you need anything or just want to chat.
Frank
Retirement Capital Advisors
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