After the FED’s latest FOMC meeting, I sat down to write my conclusions of the clear differences in ideas between how the market perceives the economic conditions and how the FED sees them.
The first word I wrote is “deglobalization.”
Deglobalization began when American voters favored Donald Trump over Hillary Clinton. Trade with China peaked, and American businesses began to take notice of their southern neighbor. What began as a political decision is now a financial one.
Deglobalization makes shipping, freight, and logistics more expensive, and it also pushes the need to build production and manufacturing capacity in your immediate vicinity.
Open border policies are thrown aside, neglected, and deserted while protectionism reigns supreme.
Globalization drives prices down but destroys the middle-class jobs of many countries. Deglobalization keeps more people employed but makes the world less efficient and more expensive.
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When things get more expensive, the public rejects the stock market and just wants to be part of the “sweetheart deal” of getting paid to wait, and it chooses to park its savings in money market accounts.
What normally drives the public out of safety and into markets is time, and I don’t think enough has passed since the bear market of 2022.
As you can see above in the top graph, China is no longer the most important trading partner of the United States, and that is by design. Governments are unwinding 80 years of Bretton Woods, Petrodollar, and post-Soviet era hyper-globalization.
As we’re doing this, the relative price of tangibles will grow compared to intangibles, which perform far better during peacetime.
In fact, it’s critical to understand that real assets as measured by real estate, commodities, and collectibles, have never been cheaper in the past 100 years than they are today!
Why am I cautious for the first time in 18 months if: (1) the retail investor is in money market accounts so there’s clearly no market bubble, (2) no one is buying/selling real estate, and (3) bond yields are exceptionally juicy?
The reason is that I don’t see how the present state of affairs can continue like this…
How can the money supply disappear at such a rapid pace and not cause any selling to raise capital?
How can mortgage rates remain above 7.5% and still invite buyers to purchase homes when there’s a clear shortage of entry-level housing?
It doesn’t add up, so I’m cautious even though housing and the stock market are not in a bubble.
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