Pro Perspectives 12/19/19

December 19, 2019

As we discussed yesterday, it was a year ago (today), that the Fed dealt a damaging blow the economy and the stock market, by systematically hiking rates for the eighth time (in the post zero interest rate era), and promising to continue to systematically extract liquidity from the global markets. 

A year and a month ago, the famed macro hedge fund trader, Stanley Druckenmiller, predicted a global market fallout, and the trigger.  Here’s what Druckenmiller said in November 2018 interview: 

“It’s always about liquidity … And my assumption is one of these hikes … is going to trigger this thing. And I am on triple red alert … I thought markets would anticipate there’s no more Euro ECB money spilling over into the U.S. equity market at the end of the year. So this is a good time to take a shot … I could see myself taking a big shot somewhere around year end.”

As we know, the Fed went forward with another rate hike, the ECB went ahead with its plan to quit QE, and U.S. stocks collapsed 18% in fifteen days. 

He was right.  It’s was about liquidity.  The Fed spent three years tightening into a low inflation, low growth U.S. economy, and (still) fragile global economy. And it was the one-two punch by the Fed and ECB in December was the final blow to send it all (market chaos) into motion.

So, Druck was interviewed again yesterday.  What did he say about the current environment?

He thinks the Fed is again on the wrong side, swinging the pendulum to far in the opposite direction. He likes commodities.  He likes commodity currencies. He likes rates higher.  He thinks global growth with positively surprise.  He thinks the Fed will be caught behind on inflation.  This is pretty close the view we’ve discussed in recent days.

What will trigger another downturn, in his view? 1) If there’s a political event, a change in the White House (to an anti-capitalist).  2) If we started getting enough inflation that the Fed started tightening.  3) If we have another credit event.