Fed rate hike: Whether there’s a 75 or 100 basis point hike in the Fed, the markets will rise: Mark Matthews

“I don’t think they’re going to send a very hawkish message this time and one of the reasons is that one of the key inflation inputs that the Fed uses – the University of Michigan long-term inflation forecasts – the September survey shows these forecasts are now back where they were in July last year,” Mark MatthewsMD, Julius Baer.

What should we expect from the Fed later this week – completely capitulate to the inflation panic or will they be forced to raise interest rates by 100 basis points?
Well, there’s definitely a lot to look forward to because not only will they raise rates – that’s given – we want to see how much they raise rates but they’ll also bring up the point chart that shows Fed officials’ expectations for the long-term Fed funds rate.

As far as Wednesday’s actual increase goes, delivery is just as important as the number. What I mean by that is let’s say they are up 100 basis points; If they communicate that in the context of a message that we think we’re beating inflation and the worst is behind us, then, ironically, 100 basis points is peaceful.

On the other hand, it can increase by 75 basis points and deliver a very hawkish message. There is still a lot to worry about and the market won’t like it. The tone of the speech, the statements and the subsequent press meeting will be very important but my sense is that whether it’s 75 or 100 basis points, they won’t come out and say the world is in a terrible situation. Maybe we’ll see some upside after the meeting.

So whether it’s a 75 or 100 basis point rise, do you expect the markets to rise?
I’m actually doing that, because I don’t think they’re going to give a very hawkish message this time around and one of the reasons is that one of the main inflation inputs the Fed uses is the University of Michigan’s long-term inflation forecast. The September poll was released on Friday and showed that those expectations are now back to what they were in July last year. This is an important number. A Wall Street Journal journalist covering the Federal Reserve tweeted that it’s a good number to see and is often thought of as a kind of fed casual spokeswoman.

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I’m just wondering what will happen to India, considering we’ve fallen a lot amid global peers. We’ve only fallen about 1.6% in the past week and less than 3.5% from the highs on September 15th. FIIs were selling to India but the quantity was not as high as some of its peers in other emerging markets. Will this superior performance continue?
Yes, I think it will be, because the economy is doing very well and it’s the local economy in contrast to North Asia where a lot of the economies of Japan, Korea and Taiwan depend on exports, especially technology which seems very weak at the moment. Korean exports fell 25% in August compared to August last year.

They are starting to run very large trade deficits which is surprising for these countries. So on a relative basis India with its large domestic economy looks good and I wouldn’t have said if foreigners have been big buyers over the past few years. This is what happened in the run-up to the global financial crisis.

Why was Nifty such a terrible market in 2008? It’s gone down more than the S&P 500 because foreigners were already buying tons and tons of it in 2005, 2006 and 2007 but it wasn’t like that this time. They don’t have much to sell. In fact, I see that they are the most buyers especially if the dollar starts to rise.

What is the outlook for commodity producers? There are sharp fluctuations within global commodities. What is your view of the country?
The problem is that in our lifetime we have never experienced inflation at this level in the Western world. You have to be in your 80s to have a career that has included inflation at the levels it used to be and I don’t think a lot of people in their 80s are still working today.

So none of us really know this big bogeyman swell. We know it’s peaking and it’s going down, but where’s it going down? Does it drop to 2% or 3-4-5-6%? It’s the million dollar question because based on that we will know what the interest rates are and at the moment the answer is not clear.

So, to answer your question about commodities, what I would say is that I would keep some exposure in commodities because I actually don’t think inflation is going back to 1% or 2%. I think it’s probably close to the 4% level and in that case you want to hedge against inflation and Commodities offer the best hedge.

Why is gold not rising? The easiest and most obvious hedge is to buy gold. It is the biggest hedge against inflation. But gold prices are completely different. Are we missing some basics of economics here?
I’ve been scratching my mind about gold for a long time and have concluded that it’s because of a generation transition in the ownership of wealth and the use of wealth in investment.

What I mean by that is that young people do not like gold. I think I’m talking more about Zillennials, i.e. people who are around 20 years old or in their mid-20s or less. But even for people in their 30s, I don’t think I’ve met a single person who loves gold and the truth is that in most countries including India, these young people are now the largest percentage of the population and by the end of this decade, they will have the assets.

They’re going to be big guys in the corporate community and they’re going to have a lot of money because baby boomers and Generation X are going to pass their fortune on to them and all I can say is for reasons I don’t fully understand, they just don’t like it. I based this entirely on my own anecdotal survey that I’ve been doing for about a year now. I haven’t met a single Zelali who told me they love gold. I think that’s the problem.

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