Taps Coogan – October 9th, 2022

Dr. Ed Yardeni, creator of the highly informative website Yardeni Research and author of ‘In Praise of Profits,’ recently spoke with Bloomberg about his outlook for monetary policy. To Ed’s credit, he correctly predicted that the Fed would execute three consecutive 75 basis point rate hikes back in June. He now sees one more 75 basis point rate hike in early November and then that’s it.

Some excerpts from Ed Yardeni:

“The idea of the (bearish opera) came to me Friday when Fed Chair Lael Brainard gave a speech and indicated that the Fed was between a rock and a hard place… She (Fed Chair Lael Brainard) was really concerned about financial stability… and you said on the show that financial stability is in fact one of the mandates. The question is how important it is and I think it is number one…”

“I am totally stumped… that Fed officials don’t seem to acknowledge that just focusing on the Fed Funds rate as part of the monetary tightening cycle is a mistake when you also have QT and you have a soaring dollar. These are very restrictive monetary developments… They’re not going to get to 4.5%-5%… They’ve got one more rate hike coming… I think its already breaking… The soaring dollar has been associated in the past with creating financial crises. “

“There is a recession out there and I think it is in China. It is in Europe. The rest of the world needs a safe heaven and the safe heaven remains the United States…”

“I see earnings going sideways. I think we are already in a recession, it’s just a growth recession…”

Despite having correctly called the trajectory of monetary policy this year, Dr. Yardeni has struggled to adapt his characteristic bullishness to this environment. He first claimed “capitulation lows” in February when the market was down only 10%, then switched to bearishness within days of the June low. He later reversed in July and retroactively called that June low the terminal bear market low, a low which we took out last week. Now he sounds somewhat bearish again.

We all get things wrong, but there seems to be enormous resistance among analysts to accept the pretty obvious case that, after 15 years of recklessly accommodative policy, there just isn’t a credible bull case until inflation comes down.

Markets rallying up on the premise that the markets have gone down enough to hit some perceived Fed ‘uncle point,’ as Dr. Yardeni seems to be alluding to, is obviously self-defeating.

In order to get the economy back on track, inflation has to come down but inflation is likely only going to trend lower in the near term as a result of economic weakness, so we’ve got to get through that first.