Economic sentiment began going negative last November after Fed Chairman Jerome Powell announced it was time to stop describing inflation as transitory, indicating that the central bank was kicking off its fight against rising prices.
At the start of the year, investors were pricing in seven interest rate hikes and pacing themselves for a bumpy ride that was feared to end in a strung-out
But things may be ending sooner than expected, according to Anthony Scaramucci, the founder of the investment firm SkyBridge Capital. On June 29, he tweeted, “Standby. Things are about to get a lot better”.
In an interview with Insider, he backed up his conviction by noting that even though inflation is still coming in hot, the bond market is signaling that inflation isn’t here to stay.
The 10-year breakeven rate, which measures the difference between the yields on the 10-year note and its Treasury inflation-protected equivalent, is now below 250 basis points, he said. At 2.29 on Thursday, the gauge of expected inflation was at its lowest level since September 2021, according to St. Louis Fed data.
Breakeven rates fall when investors believe inflation will be lower and therefore demand fewer TIPS, which lifts their yields and closes their gap with nominal Treasury yields. That’s happening now, and it shows the bond market is telling you inflation won’t stick long-term, he added.
Although inflation wasn’t transitory and the Fed got it wrong, it also isn’t long-term or systemic, he added. While Jerome Powell noted that the severity and persistence of supply-side frictions combined with strong demand, lead to higher than expected inflation, Scaramucci pegs the rise in prices mainly to supply chain issues.
On that premise, the good news is we’re at the bottom even if the market isn’t completely prepared for it, he noted.
May’s consumer price index, which measures changes over time, came in hot at 8.6% from the previous year. But if you take a step back from the month-to-month inflation rate and look at the overall economic situation, things are getting better, he pointed out.
For one, the pandemic is becoming endemic, he said. China is opening its factories back up, which will correct the supply chain issues over the next six to 12 months, bringing prices back down. Once this happens, the Fed’s tension will ease up on inflation and turn to fears of a recession.
Scaramucci also sees a pathway to the end of aggressive rate hikes. When stocks and real estate rise in value, consumers tend to spend more under the notion that their
is growing even if their income isn’t — known as the wealth effect. The changes in consumption as a result of the declining wealth effect will drag down demand, he noted. When that happens, we’ll go right back to the deflation fears that we had five or six years ago, he said. He believes this will prompt the central bank to end the rate hikes sooner than expected.
Scaramucci noted that the fall in demand is already beginning to show. As of Wednesday, West Texas Intermediate crude oil (WTI) was down by about 21% from its May year-to-date high, trading at around $97.55.
His estimate is that there will be another rate hike or two, one of 75 basis points and another of 50 basis points for a total of 125 basis points. Then, you have the midterms coming in November, he added.
“I bet you, we get signals from the Fed sometime in September or October that they’re going to move more cautiously on interest rate hikes and if anything, have a complete change in sentiment related to it,” said Scaramucci, who briefly served in the Trump White House as communications director.
He’s gauging that the economy will see two-quarters of negative growth leading to a shallow recession. Yet, even if consumers slow their spending, households have a tremendous amount of savings. Meanwhile, corporate balance sheets are pretty strong, he added.
By October, there’s a fairly strong case to be made that the Democrats will lose the House in the midterms, said Scaramucci. Markets like mixed governments so we will probably see the stock market rally prior to the elections, he added.
Crypto may have bottomed out too
On the digital front, crypto exchanges and hedge funds have been falling like dominoes. The collapse of Terra Luna’s ecosystem sent ripples into the sector, taking hedge funds such as Three Arrows with it. Then, companies like Genesis, BlockFi, and Voyager were over-promising yield and loans while being under-collateralized, Scaramucci said.
“There are no new mistakes. These are just different forms of prior mistakes,” Scaramucci said. “It’s almost like if Bernie Madoff got married to long-term capital management, they created the current crypto debacle, right? One part of it is fraud. One part of it is just massive over-leverage.”
He now believes we’re nearing the end of the deleveraging process and the fraud exposure. He added that the fact that FTX CEO Sam Bankman-Fried has stepped in to stabilize some of these lenders is a sign of the bottom.