We will get a taste of what direction central banks want to take us during the course of the week, but Jerome Powell's speech on Friday at the Jackson Hole Economic Symposium will likely be the big story.
Not only is Powell speaking, but his topic will be on the state of the global economy. That is key because sometimes the Fed Chair speaks about more obscure or arcane topics. This time he gets right at the heart of things.
I expect to see more of the same:
- An attempt to sound hawkish on inflation.
- Enough concerns about the economic outlook, that fears of an overly aggressive Fed are mitigated.
This likely helps the markets, but with current volatility, Friday seems like a long way away.
Even so, there are a lot of other major issues besides Powell's speech that we need to keep an eye on.
Quantitative Tightening
This is expected to ramp-up in size in September. If you believe, as I do, that quantitative easing helped inflate asset prices, this will act as a headwind.
I'm starting to see more coverage on QT again and think as we near September there will be more and more hand-wringing about what QT means for markets, and I for one am nervous.
Inventory Build
Nothing scares me more than the record inventories we have been building. I think companies overestimated consumer demand, and were overly concerned about supply-chain issues and we will now have to deal with this excess inventory.
I'm waiting for price declines in everything from grills to automobiles (though I find it "ironic," to be polite, that the entire EV industry seems to be raising prices after the inflation reduction act).
Maybe companies work their way through this inventory adjustment smoothly without hitting global manufacturing hard, but I believe that is highly unlikely.
Jobs
Even the Fed minutes noticed the various discrepancies in various job reports. Clarity on jobs will be a big driver in the coming weeks.
China
The Chinese economy is suffering and we seem to be seeing a pattern where China announces something to help futures briefly trade higher, then the realization that China's woes are not good for the global economy sinks back in.
Crypto
I think that:
1. Crypto is precariously positioned and could see a sharp and severe pullback from here (I am looking at Grayscale Bitcoin Trust (GBTC) , trading at a 33% discount to NAV as both an indicator, and a way to buy in, if my view reverses).
2. The knock-on effects to other companies (especially semi-conductor companies) will be surprisingly large, if the crash occurs.
So, while inflation and Jackson Hole are important, they are not the only stories.
I really can't help but think that on inflation, by the end of the year we will be ruing the day that we wished for lower prices as I continue to believe lower commodity prices will be tied to meaningful economic weakness!
I took off a lot of risk last week, and am nervous here, but can't get too aggressive when Powell could once again act as a catalyst for a rally.
