FED QT and interest rates partly off topic.17 Sep 2022 11:41
The FED actions remind me of a group of scientists who say do not worry about the record amount of snow in the mountains to those living in the valleys below. We have devices that can manage the snow melt so that the water will flow to seas far away. They start with their adjustments gradually melting bits of snow here and there reflecting the sun at particular times and magnify it with their protocol untested recipe. Unfortunately, the science team underestimate the forces of physics when they raise the temperature just a tiny bit beyond a critical point, and the result is not trickle flows of water, but the largest of all snow avalanches.
This month the FED are doing QT of $95B and probably a 0.75% rate hike. The capital markets across the globe have shut down everywhere bar the energy and renewables sector over the last six months. This is already baking in a big future recession as existing projects end and nothing much is replacing the capital flows of the past. We are of course seeing large number of bank jobs now going in USA, UK and Europe. They probably want the caps on income removed to retain some of the people who may have to rebuild the entire sector again sometime in the future or making do with less people and allowing them to burn out on higher pay. The FED have redefined the absence of growth as the shortage of workforce means they do not have high unemployment. However, when wages are tight, less stuff gets bought, less is made, less gets delivered and sold the earnings drop and then companies have to make savings not just in what they produce, but the numbers employed to deliver the output. Additionally, productivity falls apart as public spending retrenches, and their benefits provided to the income generating productive side of society are also adversely affected. In effect society operates in a greater number of small silos will little cohesion between them and hence low productivity.
At some point, the FED pain becomes an avalanche and companies compete to get dwindling market share and the jobs losses start a spiral that causes a second avalanche and then a third. Finally, we get to a point like in 2008 when a crisis has to be resolved with doing whatever it takes mantra as money is poured in to get everybody out of a buried hole.
Where it becomes relevant to Centamin investors is having the ability to weather this process of central bankers assuming all knowledge until something comes along for them to blame it on something else and not what they did. It could get awful in the coming weeks, and it will be those who can buy when the sector is absolutely hated that will get a major return here. Tony
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