iCapital Chief Investment Strategist Anastasia Amoroso and 22V Research Founder Dennis DeBusschere join Yahoo Finance Live to discuss inflation, the state of the stock market, supply chain constraints, consumer demand, the possibility of a 75 basis point rate hike, and the expectations for the FOMC meeting.
Because on the one hand, the message from the Fed had been that they were going to be data-dependent and be nimble. On the other hand, getting the signal two days before the decision that it was going to be different than the market predicted, what does that do to Fed credibility, Anastasia?
He was trying to strike this balanced tone. And then the last time he did that, the markets traded up on that. But then you waste that all away in a few weeks' time. And what I was going to say is, I think the markets might have been better off if he clearly said that we need to get rates to 2 and 1/2% as soon as possible and we may do this in pretty aggressive increments. I think the markets might have been OK with that because what they need is clarity. They need a predictable path, and that's exactly what we have a lack thereof.
I mean, just think about how much the market pricing had to move on basically hints from the Fed. We move from 2.6% being priced in for February of 2023 to now almost 4% being priced in for that time frame. So it's the Fed, unfortunately, that is very difficult to gauge the reaction function off of. And you know, I'm not sure that's going to change. But what it means for the market is it's just going to continue to be a struggle for now.
DENNIS DEBUSSCHERE: No. I mean, that's a "careful what you wish for" moment. I mean, take that logic to its extreme-- you want to go 100? Let's go 200. Let's go. 400. You know? Let's see what happens. Let's crush the economy. I don't think that would be the path to stabilization in market confidence, et cetera. I think what we're dealing with, which is underappreciated, is an economy that has been hit with multiple shocks over the last few years and continues to be, which makes forecasting extraordinarily difficult.
And the Fed is doing the best that they can. They clearly made a mistake, by the way, by getting way behind the curve. But they're marking to market now based on the data, and the data has been very strong on the inflationary side, very strong on the service economy side. It's not slowing as quickly as they need it to. Yes on the goods economy, which you already highlighted. But it's not happening yet on the service side of the economy, and that needs to happen before we can talk about financial conditions not needing to tighten anymore.
We have to really get to the heart of the issue, though, and I want to make this point-- there's so much emphasis on how much more they may need to tighten or not. What we really need to know is, has the financial conditions' tightening we see, which would include mortgage rates going higher, which would include stocks going down, which includes credit spreads moving wider, is that enough to slow economic growth and achieve the Fed's goal of slowing inflation meaningfully down towards their target? And if the answer to that question is yes, you have some-- a chance for the markets to stabilize.
And if the answer to that question is no, then we have a lot more downside risk. But that's the unfortunate situation we find ourselves in.
BRAD SMITH: Anastasia, one of the common thoughts that we can continue to come back to is the fact that whatever action the Fed takes today, that's not going to directly be a silver bullet to supply chain issues, that's not going to necessarily rectify some of the other matters that have really prompted inflation to run hot to this point in time.
ANASTASIA AMOROSO: That's absolutely right. And the Fed has to control what they can control. But unfortunately, they can't control food inflation, really. They can't control energy inflation, really. And what you see in the retail report today, that's what consumers are forced to spend more and more of their money on, because that inflation is running because of the supply issues that the Fed absolutely cannot fix. But I think the reason why they're talking about 75 basis points is that they're trying to perhaps counterbalance the surge in headline inflation they can't fully control with trying to control the other parts of the core CPI component by raising rates.
And I think, looking at the retail report, they're going to say, well, our policy is starting to be effective. You raise rates across the curve, mortgage rates go up, auto loan rates go up, and you see a slowdown in housing activity, new home, new vehicle purchase activity, and all the other factors tied to it, so I think it's starting to work. And I would say also it's not even so much about how much they raise rates by today, but it's the forward guidance on policy. And that's a very important tool that's at their disposal too.
I mean, rates are still pretty low, if you think about the Fed funds rate. But if you look at the 10-year Treasury, it's at 3 and 1/2% almost. So that has already been, I think, exerting downward pressure on the economy. The last thing I'll say on this-- I think the reason why they're trying to do so much so fast is, even though we see some weakening in the economy, most forecasters are still expecting 2.7% GDP growth in Q2 and 2.7% in Q3. So they have this window to raise rates to the appropriate level while the economy is [INAUDIBLE] strong. Q4, that's not going to be the case, but I think that's when they might actually pause.
JULIE HYMAN: I was just going to say, also, mortgage rates, of course, have moved up a lot, and that seems to have put the brakes or help put the brakes on the housing market, to some extent, as well. Dennis, given all of this, and given the challenge inherent in forecasting that you talked about, what should the strategy be right now? What are you recommending for clients in an environment that is changing pretty quickly?
DENNIS DEBUSSCHERE: Yeah. Besides hide, I think the main thing we're focused on is very specific niche things within the market. So one of the things-- any company that has high leverage to fixed costs-- so that's going to be labor, input costs like oil, energy, et cetera-- they're in big trouble as the Fed eventually-- and we've talked about this-- does the job of slowing the economy. So you probably have these sticky input costs that the Fed can't really control. But what they can control is the trajectory of economic growth. So you have a lot of companies that have these high fixed costs and are going to be dealing with a pricing problem going forward.
One of the areas that has been a major hiding spot that we recommend just being outright negative on right now is staples, as an example. And getting a little bit more confidence that some of the at least larger-cap tech names could be a place to hide going forward because they don't have those same input cost issues.
BRIAN SOZZI: Anastasia, have you been surprised by this rout in crypto? Because coming into this latest rout, crypto was seen as somewhat of a potential safe haven. But that trade has gotten completely blown up.
ANASTASIA AMOROSO: It has. Look, what the Fed is forcing the markets to do is flush out all areas of froth. And I'm not calling all of crypto froth, but what is becoming really clear is that, in a market that can continue to trend up, there were structures upon structures and derivatives upon derivatives that were built, and there's algorithmic coins. And if you go back and think about what happened during the financial crisis, is you make one flawed assumption and then everything else falls apart. And unfortunately, I think, some of the protocols that is now falling apart have made that one assumption that perhaps the prices can only keep going up. And that turns out to not be the case.
So the fact that the Fed is being so forceful is causing a flushed out in various speculative parts of crypto. I think that is a very good thing. Bitcoin, in particular-- yes, of course it's under pressure, because it can be construed as an inflation hedge anymore and what it's trading like instead is unprofitable tech. I don't think that invalidates Bitcoin. I think there is a price level of support. Perhaps it's $15,000, which is roughly the cost of production. But I think it's kind of a good cleansing process that we're going through.
We need to weed out the froth, and we need to focus on the applications that have utility, that have an end use, and those are the ones that will survive this.
BRAD SMITH: Dennis, I kind of want to stay on that same thread with you. A client calls you, asks is this the time to add Bitcoin or any type of crypto to my portfolio. What do you tell them?
DENNIS DEBUSSCHERE: No. You know, we don't have a strong view on Bitcoin-- but just taking over what Anastasia said-- we're in an environment where the Fed is tightening financial conditions. In a tighter financial conditions backdrop, speculative assets are going to be hit. Bitcoin is clearly a speculative asset. It has not done the job of hedging like it was advertised to do, so I'm not sure why the outlook for Bitcoin would change near-term unless there were some real large change in the Fed's desire to tighten financial conditions.
JULIE HYMAN: Is there any price to which it would fall-- which it would become attractive, Dennis?
DENNIS DEBUSSCHERE: On Bitcoin? No, not-- I mean, the $15,000 on the cost of production sounds as good as any, but it's not our area of expertise.
JULIE HYMAN: Copy.
BRAD SMITH: 22V research founder Dennis DeBusschere and chief investment strategist at iCapital Anastasia Amoroso, thank you both so much for joining us this morning.