Tavi Costa, portfolio manager at Crescat Capital, said the high debt-to-GDP ratio, excessive company valuations, and high inflation mean Fed tightening would “completely kill demand.”
“These three macro imbalances create, in my opinion, significant policy constraints when it comes to fighting inflation,” he said. “I don’t think the economy can really handle what we’re doing.”
The Federal Reserve raised its key interest rate by 75 basis points on Wednesday, causing the Dow to close 500 points lower.
“In my view, we’re going to see a bigger drop in the stock markets,” Costa claimed. “I don’t think that’s the environment you want to buy snorkels in.”
Costa spoke with David Lane, Anchor and Producer at Kitco News, at the Precious Metals Summit in Beaver Creek, Colorado.
The general inflation rate in the United States was 8.3 percent in August, down from 8.5 percent in July. “Inflation is so entrenched in the economy today,” Costa said, that it may take a long time to subside.
In particular, he called wage growth, underinvestment in natural resources, “reckless” fiscal spending, and de-globalization the “four pillars of inflation”. He highlighted the decline of globalization as the most important factor.
“We are at the beginning of a deglobalized world, which will force most advanced economies to reduce their dependence on places like China,” he explained. “It will actually create demand for goods in order to rebuild manufacturing plants in advanced economies.”
Because of these “four pillars,” Costa said we’ve transitioned to a new economic order.
“The currencies will be traded differently,” he said. “We will see changes in the interrelationships, as we will see Treasuries fall and gold rise. We will see changes in forces. Commodity-dependent emerging markets will do well.”
Even though the US still had low unemployment at 3.7 percent in August, Costa suggested that labor markets could decline.
“Most measures of labor market indicators in general are lagging indicators,” he said. “I think you need to look at the margin. Jobs are starting to drop, from pretty big levels, but they’re starting to drop dramatically. It’s one of the biggest drops since the crash of 2020 and the global financial crisis.”
Costa’s research shows that labor markets are declining a few months after stock markets started to fall.
“Initial unemployment claims are starting to rise,” he added. “Look at the number of layoffs we hear about, all the time, from big companies. This continues to feed [overall labor market]. ”
To find out why Costa’s hedge fund is up 176 percent over two years, and what Costa’s investment choices are, watch the video above.
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