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The Smart Money
David Haggith

Those in the know are betting on rising inflation and rising rates for longer.

What does it mean when the largest investment-grade corporations are issuing huge amounts of bonds and when America’s wealthiest family funds are piling into bonds but shedding pubic-corporation stocks? These are among the so-called “smart money” — the ones who know how to preserve their wealth and their credit ratings.

The first party isn’t buying bonds; they are issuing them, but why would you take on massive amounts of new debt now with interest rates so high? The answer given in one of today’s articles by MSN is simple: they are just that sure rates are going up much higher for longer than they can wait them out. They want to lock in those high rates for the money they need to raise before the situation gets worse. 

They are not betting on rate cuts anytime soon; that’s for sure. T-Mobile, for example, is looking to raise $2-billion, including unsecured senior notes with 10-year and 30-year terms.

The Seeking Alpha article that MSN sources (only available with an SA membership, so I’ll quote it for you) says rather starkly,

All eyes are on the upcoming CPI report on Wednesday, and everyone knows it’s going to be a bad “surprise,” with more bad inflation surprises to be followed later in the year.

What about those family wealth-management offices that are buying all the debt while ditching stocks? They’ve been on this diet all year, and they’re staying with it. The highly conservative shift, according to Citi, has been the largest since Citi started the study during the 2020 crash. 

With inflation, market volatility and geopolitical concerns top of mind amongst ultra-high net worth investors and their families, they are readily diversifying their portfolios and considering direct and sustainable investments," Ida Liu, global head of Citi's Private Bank, said in a statement.

Sounds like this who know how to keep what they’ve got are continuing to bet inflation rules the Fed and other central banks, so the Fed and other central banks still go higher for longer. They didn’t stay rich through many stock crashes and recessions by not knowing how to preserve their wealth while fools squander theirs in greedy gambles. Who do you think they sell to?

It’s not a hard call, really. Central banks have been telling us this all year. It’s just many don’t want to listen. Just as the above two articles came out this morning, another one was published relaying the clarion message of central banks:

The global economy is shifting toward a higher-for-longer period for interest rates, making the coming flurry of monetary decisions across the developed world pivotal in mapping out that plateau….

There’s a growing consensus that even those set to hold [rates where they are], such as the Federal Reserve, will be keen to reinforce their state of alert about inflation after dropping the ball back in 2021.

Higher-for-longer was the overarching theme that policymakers spoke to at the Fed’s retreat last month in Jackson Hole, Wyoming. And while the onset of the steepest tightening cycle in a generation varied across the Atlantic, a more united sense of purpose is now on show….

French Governing Council [of the European Central Bank] member Francois Villeroy de Galhau started laying [out his position] as early as January, when he argued that the time that rates remain high matters “at least as much” as the actual level. He now even insists that “the duration matters more.”

Which also means the duration can do as much economic damage as higher-level rates.

The Fed may hold off at this next meeting to give more time to see what is happening with inflation … unless inflation comes in with a big surprise in the upcoming report; but the consensus among economists (who are not the crowd with the best foresight) is that the Fed will still raise one more time this year and then hold all of next year. That, as far as I’m concerned, is what the Fed already forecast and underlined as its best-case scenario. It all depend on whether inflation keeps its head down, and it did just poke its unblinking crocodile eyes above the water.

The argument for a longer-lasting plateau across the world’s major developed economies is that such a policy has similar effects as raising borrowing costs higher and cutting them faster — but with less volatility for businesses and consumers.

But it’s not without risk. If pausing while inflation remains well above targets is misunderstood as central banks going soft, they may be dragged back to the tightening table and have to do even more down the road.

…There’s no denying that expectations aren’t where policymakers would like them. Consumers recently raised their outlook for inflation in three years, and the ECB’s once-favorite market gauge has risen consistently to stand at 2.6%, notably above its 2% goal….

In the US, Fed officials have warned they see the possibility of a pickup in economic growth causing inflation to move higher and emphasized the planned September pause should not be seen as a loosening in policy. “Skipping does not imply stopping,” Dallas Fed President Lorie Logan said in a recent speech.

Of course, nothing refuels that inflation like rising crude prices.

Says another article today:

Oil prices jump 2% to near 10-month high as OPEC predicts tight supplies…

"Crude prices are rallying after the OPEC monthly report showed the oil market is going to be a lot tighter than initially thought," Edward Moya, senior market analyst at data and analytics firm OANDA, said in a note.

Keeping supplies tight, Saudi Arabia and Russia last week extended voluntary supply cuts of a combined 1.3 million bpd to year end….

EIA said it expects global oil inventories to decline by almost a half million bpd in the second half of 2023, causing oil prices to rise with Brent averaging $93 per barrel in the fourth quarter.

My position since the first of the year has held solid with inflation rising again as oil rises again. Time will tell, I guess; but let us close on a slippery-as-oil humorous note:

The Biden Administration announced today it is releasing $6-billion in sanctioned Iranian oil money to Iran in exchange for six prisoners. To make things clear, Secretary Blinkining-his-eyes, said in his most clear-eyed manner that this money is designated to be used solely for humanitarian purposes. 

Apparently the blinkin’ secretary forgot that money is fungible because Iran immediately figured out what you and I did the second we heard his statement and announced it will use the released oil money anyway it wants because all the needs of its people are humanitarian. 

Before reading their response, my own reaction was, “So, what if they show they spend it solely on helping their own people? The fungible part of money and budgets is that $6,000,000,000 in new funds that goes to existing budget areas that feed and support the people frees up $6,000,000,000 in revenue that was already budgeted for those causes to be shifted over into building nuclear weapons and funding terrorism.”

So, that was the not-so-smart money, doled out by our secretary as he stared ‘em down without even blinkin’.

Seeing the Great Recession Before it Hit

My path to writing this blog began as a personal journey. Prior to the start of this so-called “Great Recession,” my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away — and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

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