Why the stock market and economy are ‘about to get better’: Scaramucci
Economic sentiment began to turn negative last November after Fed Chairman Jerome Powell announced that it was time to stop portraying inflation as transitory, indicating that the central bank was launching its fight against the price increase.
At the start of the year, investors were pricing in seven interest rate hikes and preparing for a bumpy ride that feared it would end in a nervous breakdown.
But things could end sooner than expected, according to Anthony Scaramucci, the founder of investment firm SkyBridge Capital. On June 29, he tweeted“Watch. Things are about to get better”.
In an interview with Insider, he backed up his belief by noting that while inflation is still on the rise, the bond market is signaling that inflation is not here to stay.
The 10-year breakeven rate, which measures the difference between the yields on the 10-year note and its inflation-protected Treasury equivalent, is now below 250 basis points, he said. At 2.29 on Thursday, the gauge for expected inflation was at its lowest level since September 2021, according to data from the St. Louis Fed.
Break-even rates fall when investors think inflation will be lower and therefore demand less TIPS, which increases their yields and closes their gap with nominal Treasury yields. It’s happening now, and it shows the bond market is telling you that inflation won’t last for the long haul, he added.
While inflation was not transitory and the Fed got it wrong, neither is it long-term or systemic, he added. While Jerome Powell has noted that the severity and persistence of supply-side frictions, combined with strong demand, are leading to higher-than-expected inflation, Scaramucci attributes the price rise primarily to supply chain issues. supply.
On that premise, the good news is that we are at rock bottom even though the market is not fully prepared for it, he noted.
The May consumer price index, which measures change over time, came in at 8.6% from a year earlier. But if you take a step back from the month-to-month inflation rate and look at the overall economic picture, things are looking up, he pointed out.
On the one hand, the pandemic is becoming endemic, he said. China is reopening factories, which will correct supply chain issues over the next six to 12 months, driving prices down. Once that happens, the Fed’s tension will ease on inflation and turn to fears of a recession.
Scaramucci also sees a path to an end to aggressive rate hikes. When stocks and real estate rise in value, consumers tend to spend more in the belief that their
increases even if their income is not — this is called the wealth effect. Changes in consumption resulting from the decline in the wealth effect will cause demand to decline, he noted. When that happens, we will go right back to the deflation fears we had five or six years ago, he said. He thinks this will prompt the central bank to end rate hikes sooner than expected.
Scaramucci noted that the drop in demand is already starting to be felt. On Wednesday, West Texas Intermediate (WTI) crude oil was down about 21% from its May year-to-date peak, trading at around $97.55.
His estimate is that there will be one or two more rate hikes, one of 75 basis points and another of 50 basis points for a total of 125 basis points. Then you have the midterm exams in November, he added.
“I bet we’re getting signals from the Fed in September or October that they’re going to be more cautious on interest rate hikes and, if at all, have a complete shift in sentiment on that,” he said. said Scaramucci, who briefly served in the Trump White House as communications director.
He estimates the economy will experience two-quarters of negative growth leading to a shallow recession. Yet even if consumers slow down their spending, households have huge savings. Meanwhile, corporate balance sheets are quite strong, he added.
By October, there’s a pretty strong case for Democrats to lose the House midterm, Scaramucci said. Markets love mixed governments, so we’ll likely see the stock market rally before the election, he added.
Crypto may also have hit rock bottom
On the digital front, crypto exchanges and hedge funds have fallen like dominoes. The collapse of the Terra Luna ecosystem has caused repercussions in the sector, taking with it hedge funds such as Three Arrows. Then companies like Genesis, BlockFi and Voyager were promising over-promising returns and loans while being under-collateralized, Scaramucci said.
“There are no new mistakes. They are just different forms of past mistakes,” Scaramucci said. “It’s almost like Bernie Madoff married long-term capital management, they created the current crypto debacle, isn’t it? Part of that is fraud. Part of that is just massive over-indebtedness.”
He now believes we are nearing the end of the process of deleveraging and exposure to fraud. He added that the fact that FTX CEO Sam Bankman-Fried has stepped in to stabilize some of these lenders is a sign of the bottom.