Bond bears are on the rise this week, even before the final minutes of the last Federal Open Market Committee meeting were released. On January 5, 2020, when the Fed minutes discussed quickly reducing its balance sheet while interest rates rose.
Of course, this was a December 14-15 discussion, although comments by St. Louis Fed chairman James Bullard on Thursday indicated that the more aggressive stance outlined in the
minutes was still very timely.
David Rosenberg, chief economist and strategist at Rosenberg
Research and former US chief economist at Merrill Lynch, does not believe in the harsh words of the Federal Reserve. “One should be skeptical of the Fed’s forecasts, given the poor track record, even though investors treat them (and the dot plots and FOMC minutes) as gospel,” he says.
Dating back to 2012, the Fed’s forecasts on rates had been accurate 37% of the time, correct on core inflation 29% of the time, correct on unemployment 24% of the time and accurate on actual gross home product increase 17% of the time. And the Fed has a tendency to be too bullish on growth, he adds.
“What I’m saying is that they say in the stock market never to bet against the Fed but in the bond market, I can definitely tell you that it is perfectly safe to say that you can bet against the Fed’s forecasting ability — especially when it comes to the one thing the Fed can actually control, which is the policy rate,” he says. Pointing to pulling down actual purchaser spending, housing beyond its peak, an excessive amount of inventory, a file excessive change deficit and flat-to-down actual enterprise speaking, “there is absolutely no impetus to domestic demand growth going forward and yet the Fed continues to play the role of economic cheerleader.”
If the Fed rose to 1.75% next year, there would be the possibility of a 20% decline in home values and a 30% decline in stock prices on an average turnaround. Both asset classes are already overvalued by 15%, he says.
He Recommends the stock market move from cyclical sensitivity to defensive growth such as health, basic products and public services; and corporate credits.