If you’re looking for penny stocks to buy in August, you’ve got plenty of choices. “Shiney objects” are all over the place. We saw an epic breakout (and breakdown) of AMTD Digital (NYSE:HKD) along with the sympathy sentiment that sparked momentum in hundreds of other penny stocks.
Last week saw another surge thanks to a recent financial services company, Magic Empire Global (NASDAQ:MEGL). What’s driving momentum in the stock market today? A previous name on a list of penny stocks at the end of July was Bed Bath & Beyond (NASDAQ:BBBY).
Why BBBY Stock Is Up On August 8th
There weren’t any significant headlines for BBBY stock on Monday. However, the premarket uptrend continued what we’ve already seen in recent sessions. The meme stock has come back in favor of members for a few reasons. The main reason involves the former penny stock’s short interest. With more than 40% of the float short, according to data from Fintel.IO, BBBY has become a core focus for short squeeze hunters, and today we’ve seen exactly why.
But for our readers, there has been a different point of focus, and that is coming back into the spotlight this week. Just a few weeks ago, we wrote about Bed Bath & Beyond stock following some considerable insider trading activity. The most notable was from the interim CEO, Sue Gove. She grabbed a total of 50,000 shares at prices ranging from $4.43 to $4.94 at the time of the filing. Fast-forward to August 8th, and BBBY stock is up more than 150% from that particular insider trade. For more BBBY stock filings, click here.
Penny Stocks To Buy
In light of this and the spirit of the latest surge of interest in cheap stocks, this article looks at a list of penny stocks to buy according to insiders. One insider, in particular, has placed a bet of more than $2 million (so far) in August alone.
Ring Energy Inc. (NYSEAMERICAN: REI)
The level of insider trading in REI stock has been much higher than most of the other names on this list of penny stocks. Energy stocks are red hot this year, and Ring shares surged during the first six months. Since things have cooled a bit, REI hasn’t been immune to selling pressure, and clearly, there’s ground to be made up. The June sell-off took shares back into the penny stock range, but much like BBBY, the last few weeks have been bullish.
[Read More] Penny Stocks to Buy on August 8th? 3 to Watch
The oil and gas exploration company has bounced back more than 30% from its 2022 lows. Meanwhile, the latest round of earnings and beat on EPS, and sales estimates have brought REI back into a positive light. Meanwhile, focusing on short squeeze penny stocks means that the 21.85% of the float shorted may have become an attractive focal point for some traders.
But what about “following the money” and insider trading in REI? Since the start of August, 10% Owner William Kruse has been purchasing stock. How much has he bought? So far, Kruse’s purchases racked up more than 900,000 shares of REI stock at average prices around $2.66-$2.67. If you’re keeping score at home, yes, that puts the trades at over $2.3 million. See more REI stock filings.
Standard Biotools (NASDAQ: LAB)
While the LAB stock short float percentage is “only” around 11%, the company is gaining traders’ interest for other reasons. This week the company reports second-quarter earnings. Today (8/8), after the closing bell, Standard BioTools reveals its latest performance with a lot that may be riding on the numbers.
The company fell short on EPS in its first quarter but slightly beat sales estimates. Michael Egholm, Ph.D., Chief Executive Officer and President of Standard BioTools, explained, “…Our financial performance for the first quarter was, frankly, disappointing and adversely affected by related disruptions in our U.S. sales force, as well as continued COVID-19 related issues, particularly in APAC. We are taking immediate steps to address the operational issues with new leadership including the recent appointment of Jeremy Davis as Chief Commercial Officer. Mindful of our past and its lessons, we now embark on a new chapter of focused execution and growth, and 2022 will serve as the foundation we will build upon.”
With this, investors will find out if the company was able to deliver on any of these “immediate” steps to shift its course.
Prompting a bit more optimism in the market were insider trades in LAB stock. In particular, the fund that has been doing a majority of buying this summer, Caligan Partners LP, scooped up more than 900,000 so far this month. The last purchase on August 4th brought the firm’s total indirect holdings to more than 11.44 million shares. See more LAB stock filings.
Conduent Inc. (NASDAQ: CNDT)
The business process and solutions company Conduent Inc. has made attempts to bounce back this year to no significant avail. A choppy year saw the penny stock dip to new 52-week lows of $3.71 last week shortly after reporting second-quarter earnings.
[Read More] How to Trade Penny Stocks in August 2022
CNDT stock has managed to bounce back strongly during the sessions that followed. Cliff Skelton, Conduent President & CEO, explained in a business update that “Q2 represents another quarter where our team continued to deliver in line with expectations regarding Revenue performance, Adjusted EBITDA, and Sales…We, as a Conduent team, in concert with our Board and largest public and private shareholders, remain optimistic about the future of our businesses because of our unique technologies, our solution and service capabilities, and our strong associate base.”
On the heels of this optimistic commentary, CNDT stock has seen a jump in insider activity. Last week, CEO Skelton and CFO Henry Wood reported purchasing just over 47,000 shares of company stock apiece. These trades amounted to roughly $400,000 in insider transactions in total. See more CNDT stock filings.
Penny Stocks For Beginners
This is just a quick snippet of info on a few trending penny stocks today. The next step is doing full research. If you’re brand new to trading penny stocks in 2022, here are a few good articles to checkout and some extra info on the best way to learn how to day trade, swing trade or invest for the long-term:
- How To Make Money Trading Penny Stocks During A Recession
- How To Find The Best Penny Stocks To Buy Using Fundamental Analysis
- Penny Stocks: Looking At The Big Picture For Tiny Stocks
- Buy Penny Stocks Like Hedge Funds Do: A How-To Guide
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Three Infrastructure Investments to Buy as War and Inflation Rage
Three infrastructure investments to buy as war and inflation rage offer ways to overcome ongoing economic risks in pursuit of precious profits. The three…
Three infrastructure investments to buy as war and inflation rage offer ways to overcome ongoing economic risks in pursuit of precious profits.
The three infrastructure investments to buy as war rains terror and destruction, inflation rampages and the Fed raises rates feature companies that appear well-positioned to succeed amid market mayhem. Stocks have advanced in the past couple of trading days, but the economic and geopolitical risks still leave many prognosticators warning that a new 2022 market bottom may yet lie ahead.
One of the three infrastructure investments to buy showcases a company whose unmanned drones have proven their value in Ukraine as the nation’s outnumbered defenders recently have begun to push back a Russian invasion of more than 120,000 troops that began Feb. 26. Another company on the list of three infrastructure investments to buy includes a producer of solar panels that could help alleviate a war-related energy shortfall in Europe due to Russia cutting its supply of gas to nations opposing its attack of Ukraine.
Three Infrastructure Investments to Buy Look to Evade Financial Fallout
“Stocks have been beset with no shortage of problems in recent weeks,” wrote Mark Skousen, PhD, to subscribers of his weekly Home Run Trader advisory service. “The primary negative, of course, is that the Federal Reserve is determined to slow the economy, reduce demand, and thereby bring down inflation.”
Mark Skousen, Forecasts & Strategies chief and Ben Franklin scion, meets Paul Dykewicz.
However, too much tightening, too fast, risks pushing the United States into a recession, continued Skousen, an economist who uses his analysis of inflation, interest rates and monetary policy in recommending stocks and options to buy. Economic statistics are showing a slowdown in the economy, if not a recession, he added.
“Even though real gross domestic product (GDP) is slightly negative, second-quarter gross output (GO) — which measures total spending in the economy — grew by 1.7% in real terms,” Skousen stated. “GO includes the supply chain, which is still catching up from the lockdown-induced shortages.”
Three Infrastructure Investments to Buy Face ‘Super-Strong’ Dollar
Additional concerns include a “super-strong dollar,” sliding consumer confidence and a cooling residential real estate market, Skousen counseled.
Investors can consider an exchange-traded fund that offers broad exposure to companies providing automation infrastructure, said Bob Carlson, a pension fund manager who also leads the Retirement Watch investment newsletter.
Bob Carlson, investment guru of Retirement Watch, talks to Paul Dykewicz.
Carlson suggested Robo Global Robotics and Automation (ROBO), a fund that seeks to follow an index that is concentrated in robotics-related or automation-oriented companies. The fund had decent performance until 2022 when it plunged. The fund became caught in the downdraft that befell technology and industrial companies.
Both sectors have done poorly as interest rates rose in 2022, Carlson commented. The fund is down nearly 40% in 2022, while its three-year return is just shy of an annualized 6%.
The fund owns 81 stocks and has 17% of the fund in the 10 largest positions. ROBO’s top holdings recently consisted of Cognex (NASDAQ: CGNX), Intuitive Surgical (NASDAQ: ISRG) and IPG Photonics (NASDAQ: IPGP).
Chart courtesy of www.stockcharts.com
Three Infrastructure Investments to Buy Buoyed by Unmanned Drone Stock
“Additive manufacturing technologies are at an inflection point in their ability to solve challenges faced by manufacturing companies, particularly with recent labor shortages and supply chain disruptions,” according to Chicago-based investment firm William Blair & Co. “Historically, additive manufacturing applications have been limited by productivity capabilities and lack of industrial strength materials.”
Executives of AeroVironment, Inc., (NASDAQ: AVAV), an Arlington, Virginia-based maker of unmanned drones and other multi-domain robotic systems, recently gave a presentation to William Blair analysts about how software from its Plank and Progeny acquisitions provided a key competitive advantage. Indeed, the success of AeroVironment’s “kamikaze drones” in Ukraine may extend into Asia.
AeroVironment officials compared the Ukraine War-related Switchblade media coverage to “100 SuperBowl ads worth of press.” Before the war, AeroVironment was not even authorized to export the Switchblade.
“It was used in the Middle East for over a decade, but it was viewed as a niche offering,” William Blair analysts wrote. “Ukraine is providing a testing ground that proves the Switchblade 300 is incredibly valuable. Now it has U.S. State Department permission to sell to more than 20 countries. In mid-September, it was reported that Japan is evaluating purchasing several hundred kamikaze drones and is evaluating AeroVironment’s Switchblade.”
A recent Switchblade 600 contract for Ukraine valued at $2.2 million may be a tipping point. On Sept. 15, almost six months after an initial report that a contract was in the works, it came to fruition.
While Javelin, Stinger and TOW traditional missile systems have a three-mile maximum range, the Switchblade 600 has a 20-mile top range with similar effects. The Switchblade 600 has the same size warhead and can be launched without a visual lock on the target, William Blair analysts wrote in a recent research note.
AeroVironment Stands out Among Three Infrastructure Investments to Buy
William Blair rated AeroVironment to “outperform” the market and indicated it appears to be the favorite to win the Army $1 billion/10-year FTUAS program, but an executive at the robotics company estimated that the U.S. Navy addressable market may be larger than the potential market for the Army. Software from Planck, acquired by AeroVironment, enables the JUMP-20 military battlefield drone to perform vision-based autonomous landings onto moving platforms, such as maritime vessels.
The JUMP-20 is a vertical takeoff and landing (VTOL), fixed-wing unmanned aircraft used to provide advanced multi-sensor intelligence, surveillance and reconnaissance (ISR) services. AeroVironment’s systems “flourished” during Navy IMX 2022 exercises earlier this year, according to William Blair.
Regarded as the largest unmanned exercises in the world, IMX 2022 showed how AeroVironment’s LEAP software received feeds from manned aircraft, unmanned aircraft, manned vessels and unmanned vessels. At IMX 2022, AeroVironment’s LEAP software was not supposed to be the hub, but when other software “was not executing.” AeroVironment’s LEAP software assumed the hub role on an ad hoc basis.
“We expect AeroVironment’s success at IMX 2022 to lead to contracts for its JUMP-20, Puma and Switchblade aircraft down the road,” the William Blair analysts wrote.
Chart courtesy of www.stockcharts.com
Three Infrastructure Investments to Buy Include Standex International
Standex International Corporation (NYSE: SXI), a multinational manufacturer of food service equipment, engravings, engineering technologies, electronics and hydraulics headquartered in Salem, New Hampshire, has many growth paths ahead of it. Rated by William Blair to “outperform” the market, Standex International could materially accelerate organic growth to 10% or more during the next two to three years, excluding its commercial solar panel production volumes for an innovative Gr3n joint venture with Italy’s Enel (OTCMKTS: ENLAY).
That partnership with a multinational manufacturer and distributor of electricity and gas has gained importance due to the suspected sabotage of both under water pipelines of the Nord Stream 1 from Russia to Western Europe, along with one line of Nord Stream 2. Seismologists in Denmark and Sweden suggest that sizeable explosions on the order of 100 kilograms of TNT occurred in both incidents.
With Russia’s President Vladimir Putin facing unexpected battlefield setbacks more than six months after he ordered a Feb. 26 invasion of neighboring Ukraine that the former KGB agent euphemistically called a “special military operation,” the pipeline sabotage seems targeted to hurt European nations as winter nears. Since Putin ordered troops into Ukraine in February, Russia has cut supplies of natural gas to Europe to heat homes, generate electricity and fuel factories.
European Leaders Complain of ‘Energy Blackmail’ by Putin
European leaders have accused Putin of using “energy blackmail” to weaken their support for Ukraine as the country seeks to repel Russia’s aggression.
Without presenting any evidence, Russian officials are attempting to blame the United States for the apparent sabotage, even though the affected nations are among America’s closest allies. President Biden countered the accusations were the latest in a continuing Russian campaign of “disinformation and lies.”
Biden also described the explosions of the Nordstream pipelines as acts of “sabotage” and discussed sending divers to examine the pipelines to find evidence that could be brought to light. Russia’s audacious move to “annex” Ukrainian territory in a Putin-led ceremony last Friday, Sept. 30, was declared illegal by Ukraine, the United Nations, the United States and many other Western allies who said it violated Ukrainian and international law.
Solar Panel Design Aids One of Three Infrastructure Investments to Buy
Standex further plans to benefit from significantly higher research and development (R&D) investments for new product development to “materially increase organic sales growth,” William Blair opined. New product launches are expected across all five of Standex’s businesses in fiscal 2023, including high growth end-markets such as renewable energy, electric vehicles, human health, commercialization of space and sustainable products.
Standex’s Gr3n joint venture could attain full commercialization by mid-decade, potentially becoming Standex’s sixth business segment. The result could boost Standex’s “organic sales growth” to the low teens in the next three to five years, the William Blair analysts wrote.
The joint venture has developed and tested a prototype for a highly innovative, extremely efficient and 100% recyclable new solar panel design that is 30-35% more efficient and weighs 38% less than traditional glass solar panels. With interest in solar panels rising as the European Union (EU) scrambles to replace the 40% of its energy previously sourced from Russia, Standex is expanding electronics’ production capacity in Germany, China and India, the investment firm reported.
“If the new recyclable, highly efficient solar panel can be cost-effectively produced, it could become the largest new product in Standex’s history,” according to the William Blair analysts.
Chart courtesy of www.stockcharts.com
U.S. CDC Halts Its Country-by-Country Travel Notices
The U.S. Centers for Disease Control and Prevention (CDC) dropped its country-by-country COVID-19 travel health notices on Monday, Oct. 3. Those warnings began early in the pandemic as COVID-19 cases and deaths climbed.
COVID risks affect supply and demand for infrastructure stocks, but not as much as cyclical companies whose share prices can soar when economic conditions are favorable but fall fast when inflation, a potential recession and Fed interest rate hikes imperil stock prospects. Savvy investors monitor COVID-19 outbreaks and lockdowns to forecast how certain stocks and sectors, such as infrastructure, are affected.
Another encouraging sign occurred when Canada announced on Sept. 26 that it would remove all remaining COVID-19 entry restrictions, such as testing, quarantine and isolation requirements. That development could boost trade and tourism between that country and the United States.
China’s strict zero-tolerance COVID policy continues to be controversial and recently sparked a rare protest in its technology hub of Shenzhen, social media video showed. The dissent came after government officials ordered a sudden lockdown due to 10 new infections on Sept. 27 in the city of more than 18 million people. Officials ordered residents in three districts there to stay home.
China has locked down more than 70 cities fully or partially to preserve its zero-tolerance policy of COVID. However, 27 people were killed and 20 more were injured when a quarantine bus overturned on a mountain road on Sept. 20.
U.S. COVID-19 deaths ticked up by nearly 4,000, up about 1,000 compared to roughly 3,000 the previous week. Cases in the country totaled 96,481,081, as of early Oct. 5, while deaths jumped to 1,060,408, according to Johns Hopkins University. America stands out dubiously as the nation with the most COVID-19 deaths and cases.
Worldwide COVID-19 deaths in the past week rose by more than 11,000, up about 2,000 from the prior week. The number of deaths totaled 6,550,203, as of Oct. 5, according to Johns Hopkins. Global COVID-19 cases reached 619,211,562.
Roughly 79.5% of the U.S. population, or 264,112,767, have received at least one dose of a COVID-19 vaccine, as of Oct. 5, the CDC reported. Fully vaccinated people total 225,284,115, or 67.9%, of the U.S. population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to almost 110 million people.
The three infrastructure investments to buy can be repurchased at reduced prices after a rough 2022 market wide. Despite high inflation, Russia’s continuing war in Ukraine and recession risk after 0.75% rate hikes by the Fed in June, July and Sept. 21, the three infrastructure investments to buy offer some insulation compared to cyclical stocks with government budgets less economically sensitive than the private sector.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.
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Roubini: The Stagflationary Debt Crisis Is Here
Roubini: The Stagflationary Debt Crisis Is Here
Authored by Nouriel Roubini via Project Syndicate,
The Great Moderation has given way to…
The Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. US and global equities are already back in a bear market, and the scale of the crisis that awaits has not even been fully priced in yet.
For a year now, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations.
How do these predictions stack up? First, Team Transitory clearly lost to Team Persistent in the inflation debate. On top of excessively loose monetary, fiscal, and credit policies, negative supply shocks caused price growth to surge. COVID-19 lockdowns led to supply bottlenecks, including for labor. China’s “zero-COVID” policy created even more problems for global supply chains. Russia’s invasion of Ukraine sent shockwaves through energy and other commodity markets. And the broader sanctions regime – not least the weaponization of the US dollar and other currencies – has further balkanized the global economy, with “friend-shoring” and trade and immigration restrictions accelerating the trend toward deglobalization.
Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors.
It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.
Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario.
While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets – including bond and credit markets – has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash.
I have also long argued that central banks, regardless of their tough talk, will feel immense pressure to reverse their tightening once the scenario of a hard economic landing and a financial crash materializes. Early signs of wimping out are already discernible in the United Kingdom. Faced with the market reaction to the new government’s reckless fiscal stimulus, the BOE has launched an emergency quantitative-easing (QE) program to buy up government bonds (the yields on which have spiked).
Monetary policy is increasingly subject to fiscal capture. Recall that a similar turnaround occurred in the first quarter of 2019, when the Fed stopped its quantitative-tightening (QT) program and started pursuing a mix of backdoor QE and policy-rate cuts – after previously signaling continued rate hikes and QT – at the first sign of mild financial pressures and a growth slowdown. Central banks will talk tough; but there is good reason to doubt their willingness to do “whatever it takes” to return inflation to its target rate in a world of excessive debt with risks of an economic and financial crash.
Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyberwarfare; and fiscal policies to boost wages and workers’ power.
Where does that leave the traditional 60/40 portfolio? I previously argued that the negative correlation between bond and equity prices would break down as inflation rises, and indeed it has. Between January and June of this year, US (and global) equity indices fell by over 20% while long-term bond yields rose from 1.5% to 3.5%, leading to massive losses on both equities and bonds (positive price correlation).
Moreover, bond yields fell during the market rally between July and mid-August (which I correctly predicted would be a dead-cat bounce), thus maintaining the positive price correlation; and since mid-August, equities have continued their sharp fall while bond yields have gone much higher. As higher inflation has led to tighter monetary policy, a balanced bear market for both equities and bonds has emerged.
But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress.
The crisis is here.
A Policy Mistake In The Making
A Policy Mistake In The Making
Authored by Lance Roberts via RealInvestmentAdvice.com,
“Market Instability” Causes BOE To Reverse QT….
“Market Instability” Causes BOE To Reverse QT. Is The Fed Next?
“Market instability” remains the most significant risk to central banks globally. Despite their desire to combat surging inflation, market instability is a greater risk to global economies due to the massive amounts of leverage. We previously discussed the importance of controlling instability. To wit:
“Interestingly, the Fed is dependent on both market participants and consumers, believing in this idea. With the entirety of the financial ecosystem now more heavily levered than ever due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the most significant risk.
The ‘stability/instability paradox’ assumes that all players are rational, and such rationality implies avoidance of complete destruction. In other words, all players will act rationally, and no one will push ‘the big red button.’”
So far, the Fed remains fortunate with a low volatility decline in markets. In other words, “market stability” continues to afford the Federal Reserve the operating room needed for the most aggressive rate hiking campaign since the late 70s. Market volatility and credit spreads remain “well contained” despite drastically higher interest rates and an ongoing stock market decline.
However, stable markets can become unstable rapidly when something breaks due to rising rates or volatility. The Bank of England (BOE) is an excellent example of what happens when things go awry. The BOE was forced to start buying bonds to solve a potential crisis with U.K. pension funds. The pension funds receive margin with yields fall and post additional collateral when yields rise. However, when yields spike, as they have recently, the pension funds are hit with “margin calls,” which have the potential to cause market instability. Due to leverage built up through the entire financial system, market instability can spread like a virus through global markets. Such was last seen with the Lehman Crisis in 2008.
Is the BOE’s actions an isolated event? Maybe not. According to Charles Gasparino, the Fed could be next.
SCOOP (1/2): @federalreserve officials getting increasingly worried about "financial stability" as opposed to inflation as higher rates begin to crush bonds, several big investors tell me. Fed growing worried about possible "Lehman Moment" w a 4% FF rate as Bonds and derivatives— Charles Gasparino (@CGasparino) September 30, 2022
The Market Instability Risk
The Federal Reserve is deeply committed to its aggressive campaign to quell surging inflation. As Jerome Powell stated at this year’s Jackson Hole Summit:
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
While the Federal Reserve is willing to cause “some pain” to achieve victory, they hope to do so without evoking a recession. Such may be a challenge for two primary reasons:
The Fed remains focused on lagging economic data, such as employment, which are highly subject to future revisions, and;
Changes to monetary policy do not show up in the economy until roughly 9-12 months in the future.
The problem with the Fed’s use of economic data to guide monetary policy decisions was the subject of a St. Louis Federal Reserve research note. To wit:
“In the two quarters leading up to the average recession, all measures were still experiencing varying degrees of positive growth. Meanwhile, immediately following the onset of the average recession, all six indicators declined, which ultimately persisted for the entirety of the recession.”
Such brings us to the second most critical point.
Changes to monetary policy have a 9-12 month lag before showing up in the economy. Therefore, as the Fed is hiking rates based on lagging economic data, the risk of a “policy mistake” becomes heightened. By the time the economic data deteriorates, the preceding rate hikes have yet to impact the economy, which eventually deepens the recession.
As shown, the annual rate of change of the Fed Funds rate is now the most aggressive increase in history. However, every previous rate hiking campaign has led to a recession, bear markets, or economic event.
However, the Federal Reserve does not operate in an economic vacuum. Other factors also contribute to the tightening of monetary policy and the impact on economic growth. When those other factors such as higher interest rates, falling asset prices, or a surging dollar coincide with the Fed’s policy campaign, the risk of “market instability” increases.
A Policy Mistake In The Making
The current bout of inflation is vastly different than that seen in the late 70s.
Milton Friedman once stated corporations don’t cause inflation; governments create inflation by printing money. There was no better example of this than the massive Government interventions in 2020 and 2021 that sent subsequent rounds of checks to households (creating demand) when an economic shutdown constrained supply due to the pandemic.
The following economic illustration shows such taught in every “Econ 101” class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases by providing “stimulus” checks.
The problem for the Fed is the influence of lagging economic data on its decisions. In contrast, forward estimates for inflation are already falling quickly as economic demand falters due to collapsing liquidity.
Historically, the “best cure for high prices is high prices.” In other words, inflation would resolve itself as high costs curtail consumption. However, the Fed is not operating in a vacuum. While the Fed is hiking interest rates to slow economic activity, interest rates and the dollar have also increased dramatically in recent months. Those increases apply further downward economic pressures by increasing costs domestically and globally. Not surprisingly, sharp annual increases in the dollar are coincident with market instability and economic fallout.
Furthermore, the surge in the dollar accompanied the sharpest increase in interest rates in history. Sharp increases in interest rates, particularly in a heavily indebted economy, are problematic as debt servicing requirements and borrowing costs surge. Interest rates alone can destabilize an economy, but when combined with a surging dollar and inflation, the risks of market instability increase markedly.
The Fed Will Blink
After more than 12 years of the most unprecedented monetary policy program in U.S. history, the Federal Reserve has put itself into a poor situation. They risk an inflation spiral if they don’t hike rates to quell inflation. If the Fed hikes rates to kill inflation, the risk of a recession and market instability increases.
As noted at the outset, the behavioral biases of individuals remain the most serious risk facing the Fed. For now, investors have not “hit the big red button,” which gives the Fed breathing room to lift rates. However, the BOE discovered that market instability surfaces quickly when “something breaks.”
When will the Fed find the limits of its monetary interventions? We don’t know, but we suspect they have already passed the point of no return, and history is an excellent guide to the adverse outcomes.
In the early ’70s, it was the “Nifty Fifty” stocks,
Then Mexican and Argentine bonds a few years after that
“Portfolio Insurance” was the “thing” in the mid -80’s
Dot.com anything was an excellent investment in 1999
Real estate has been a boom/bust cycle roughly every other decade, but 2007 was a doozy.
Today, it’s real estate, FAANNGT, debt, credit, private equity, SPACs, IPOs, “Meme” stocks…or rather…” everything.”
The Federal Reserve continues to state its intentions to hike rates and reduce its balance sheet at the fastest pace in history, as inflation is the enemy it must defeat. However, while high inflation is detrimental to economic growth, market instability is far more insidious. Such is why the Federal Reserve rushed to bail out banks in 2008.
Unfortunately, we doubt the Fed has the stomach for “market instability.” As such, we doubt they will hike rates as much as the market currently expects.
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