Dudley discount factor
Bill Dudley gave an absolutely striking interview in Bloomberg, which we’ve written a little about, but bears revisiting.
Here’s his comments on the US:
“In contrast to many other countries, the U.S. economy doesn’t respond directly to the level of short-term interest rates. Most home borrowers aren’t affected, because they have long-term, fixed-rate mortgages. And, again in contrast to many other countries, many U.S. households do hold a significant amount of their wealth in equities. As a result, they’re sensitive to financial conditions: Equity prices influence how wealthy they feel, and how willing they are to spend rather than save.”
And the crucial bit:
“Investors should pay closer attention to what Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.“
So, they’ve said the quiet part out aloud. Don’t fight the Fed. Specifically, we are playing this through a) an underweight to Australian shares, as we view the above comments will hinder commodities, which Australia is disproportionately exposed to and b) underweight to secular growth narrative (like those you’d find on the Nasdaq, but also on/in the ASX Consumer Discretionary, Tech, Utilities, and REIT sectors).
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