Journalist: Wall Street has been on the rise for four consecutive weeks. The correction is behind us. The solidity of the floor has already been verified. The rate anxiety is over. Neither the short nor the long are on the warpath. The economy calmed down, and it calmed down the Fed. Is it time to go looking for records? Or do you still need to take an exam?
Gordon Gekko: The Bag is taking a break. The distance to the records is not far -5.4% at the close of January 3, 2022- and there are no defaults on the coast, but, taking into account the short spike in November, an almost straight line advance of 8% , is logical to pause first and change the air.
Q: You don’t see obstacles on the way. Just a matter of fatigue.
Q: A break is needed, a little more time to recover energy, but not for economic conditions to change.
GG: That’s the idea.
Q: Does the Fed also not have to change its position? Suggest, for example, that you are willing to start considering lowering interest rates.
GG: No. If the economy is in good health, there is no reason to rush to cut rates. And why should good health be an impediment for the Stock Market to dare to go for more?
Q: The evidence of a successful landing is enough for you.
GG.: Correct. Which has not yet been completed but is already at the head of the track. It’s no small thing. The other way around. It’s a feat.
Q: A landing error could force the plans to be cancelled. Whether it’s a very high inflation reading…
GG.: Or also a string of economic indicators that show unexpected weakness. There is no reason to rule it out. And at this point, it seems like a more likely threat to me than, say, a couple of successive bad monthly inflation readings.
Q.: The looming recession. If, finally, it is present.
GG.: A recessionsmooth and flat, would be a Torpedo below the bull market waterline. Definitely. But it seems difficult for it to occur unless an exogenous shock occurs. However, the current dynamics could cause a slip, a temporary drop in spending and activity, which raises the suspicion of a recession, but without necessarily materializing it.
Q: There, the Fed would be important. And the reduction of rates.
GG.: OK. In that framework, in which the economy falters first and forces the Fed to consider lowering rates, the Stock Market could also become complicated. As I said before, the best thing is a healthy economy, with stable interest rates. Look at the behavior of long rates. The economy grew 4.9% in the third quarter. He showed incredible strength. And for the Fed it was a cause for concern. How much more would we have to do to appease her?
Q: That is now behind us. Nothing had to be done. She calmed herself down.
GG.: Okay. Long rates – ten years – fell from 5% to 4.40% due. Those are nominal rates. But what happened to the real rates, to the TIP yields, to the Treasury bonds that adjust for inflation?
Q: What happened?
GG.: They also fell, but only half. The entire curve yields well above 2%.
Q: I remember when it was discussed why they were all negative. What do you anticipate now? One would say that it is a robust economy and not one that is dangerously weakening.
GG.: If they saw a recession, they would have collapsed. Without a doubt. But will the economy be as strong as the naked eye suggests? That would put it in doubt. In principle, what was detected is an increase in the time premium, in the spread between short and long instruments. Perhaps the fault of the Treasury’s financing mix. And that the Fed continues to shrink its balance sheet. Now that the entire TIP curve has flattened, perhaps what matters is demand limitations, especially from dealers and other regulated entities. I wouldn’t trust myself too much. But, in any case, I believe that the Stock Market, helped by the seasonality of the holidays and January, will be able to go look for the records before the data can bring us evidence of new problems. And of course, if the economy weakens, the Fed has more than enough of a cushion of rates to lower and stabilize the situation without serious damage being done.
Source: Ambito
