Dear Reader,
Greetings from Sydney, Australia.
A lot has happened since I arrived here three weeks ago. Namely, the banking sector went up in flames when three U.S. banks collapsed in one week.
Shortly afterward, Credit Suisse – one of the biggest financial institutions in the world – followed.
At the same time, the Federal Reserve continued its fight against inflation.
Last Wednesday, during the March Federal Open Market Committee (FOMC) meeting, the Fed hiked interest rates by another 0.25%.
That means that, given recent developments, the Fed is choosing to tread carefully.
The effects of the banking turmoil are still playing out in the economy. And after meeting with business leaders and policymakers around Australia, I’ve learned that the worst of inflation may be behind us.
This means Stage 2 of the Fed’s three-stage pivot could come sooner than I expected. In the video below, I break it all down for you.
Click on the image below to watch it, or scroll down to read the transcript.
Regards,
 |
Nomi Prins
Editor, Inside Wall Street with Nomi Prins
TRANSCRIPT
Hi everyone. Nomi here and greetings from Sydney, Australia.
I started my boots-on-the-ground visit to Australia in Sydney, and I’m ending it here, too.
After thousands of miles traveled, gatherings with business leaders ranging from the finance sector to the natural resource industry, I have learned a lot.
But more on that in just a moment.
You see, the FOMC or the committee leadership that guides the Federal Reserve, decided to hike interest rates by 25 basis points on March 22 to 4.75%.
The move is worth paying attention to with financial institutions like Silicon Valley Bank and Credit Suisse collapsing.
While both face different issues, the problem at their core was a crisis of confidence.
That brings me to the FOMC and what its leadership had to share.
The Fed noted in its public release that job gains have picked up and that the U.S. banking system is sound and resilient.
As if. Then, within the same release, it said recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.
What it failed to explain, and what I want you all to know, is how clueless the Fed is about the connection between rate hikes and the bank failures that the U.S. and world has experienced.
It is clear that the rapid Fed hikes have impacted banks.
It’s also clear now that as the Fed continues to hike rates, it has signaled it believes that the financial system and economy can tolerate bank failures.
As we’ve talked about the phases the Fed will take, this puts them in Stage 1 of the three-stage pivot.
Still, if the Fed is truly a data driven organization, the failures of multiple banks should be indicators enough that the system is not only fragile, but that the next shoe to drop won’t just be banks but workers across the labor force.
That’s why I think they might have to pivot as soon as the next FOMC meeting.
Here in Australia, and across other developed economies, inflation is starting to ease.
By summer, we should have indicators that the trend has cooled a bit more. Already, wage growth is slowing here and in the United States.
For the Fed, according to its own data sets, that should soon lead to an ease in service-based inflation.
The expectations are that corporations will also be unable to continue price hikes as the banking turmoil reverberates throughout the economy.
As I’ve met with business leaders and monetary policy leaders here in Australia, the belief is that the worst of inflation may be behind us.
It’s not gone, but the worst of it is behind us.
What you should be watching now is the way the central banks, starting with the Fed, respond.
In our global economy, what happens in the U.S. matters around the world.
Sectors like the banking sector, my old stomping ground, will likely come under immense pressure in the weeks and months ahead, and savvy investors would be wise to shy away from them unless they can stomach such volatile times.
Conversely, sectors in the natural resource space – like producers and extractors of gold, aluminum, lithium, and other precious metals or real assets – are the place to look for profit, opportunity, and upside.
Happy investing, and I’ll talk to you soon.