It is quite refreshing to hear the chair of the Federal Reserve say that he doesn’t know what is going on with the economy. The word “uncertain” was peppered throughout Jerome Powell’s press conference after the Federal Open Market Committee left interest rates unchanged at 3.75%.
If Powell doesn’t know what is happening, then what chance do we have? Point is, the world is a complete fog. Admittedly, it has been five years since the pandemic, but the global economy is still not back to normal.
Sure, the rate of inflation has come down from its pandemic peak of around 8%. Governments love to brag about bringing down inflation. But all that has happened is that the rate of price increases has slowed. Prices have not returned to their pre-pandemic levels. And they are unlikely to ever return to those levels again.
On top of inflationary pressures, we have the US tariffs. In theory, the Trump tariffs should be inflationary. But those higher prices are not showing up in the official data. Could it be that importers and retailers have been absorbing some of the import taxes for now, only to raise prices gradually over time. In which case, stubbornly high inflation could persist for some time.
Then we have the US-led war against Iran. It is still unclear why Trump chose to attack Iran in the first place. If we don’t know why the war was ever started, then how can we possibly know when it is over. Trump had claimed that the US has already won. But crude prices at around $100 a barrel would suggest otherwise.
If any of the above isn’t already enough, we have to work out the impact that AI could have on the global economy. Billions have already been invested into building the infrastructure to support the next “big thing” in technology. And billions more could be spent. So far, investors have yet to see a meaningful return on the investment. Perhaps they will, one day. But that is unlikely to happen without massive job losses to justify the massive investments.
With all that is going on, investors are having a tough time deciphering what exactly is going on. Instead of looking through a telescope to see what could happen in the future, it is more like peering into a kaleidoscope. It is little wonder that the stock, bond, commodity and money markets are constantly on edge.
One minute, the bond market looks like a safe place to be, until it isn’t. Gold looked like a good bet for a while, until it wasn’t. Money markets are all over the place. Can you remember, not that long ago, when currency experts were talking about de-dollarisation? The dollar index is hovering around a 10-month high.
It wouldn’t be a total surprise if some of us are hoping for calmer waters. But take note of Warren Buffett’s sage words: “We pay a very high price in the stock market for a cheery consensus.”
When all investors are optimistic about the overall market, it can lead to high expectations and high valuations. Instead, uncertainty is the friend of the long-term investor. It means that we can buy high-quality companies at reasonable prices, which is what we should be doing.
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