DBEU - Brad Simpson On The Latest Rate Hikes And The Implications For Markets

2023-08-01 01:56:00 ET

Summary

• The Fed's trial-by-error approach to inflation.
• The Fed and ECB hiked rates again. Now what?
• How to manage your portfolio when traditional data doesn't tell the whole story.

The U.S. Federal Reserve and the European Central Bank have both again raised interest rates as they continue their battle against inflation. Brad Simpson, Chief Wealth Strategist at TD Wealth, discusses the latest monetary policy decisions and the implications for markets.

Anthony Okolie: The US Federal Reserve has taken interest rates to a 22-year high after raising its key rate by another 25 basis points. The central bank also indicated it may not be done, suggesting another hike could be in the works later this year. And earlier today the ECB, the European Central Bank, took its rate to a 23-year high and said it too may not be done.

So now what? Well, let's bring in Brad Simpson, Chief strategist with TD Wealth. Brad, thanks for joining us today.

Brad Simpson: Hi, there. It's great to be here. Thanks for having me.

Anthony Okolie: So Brad, I want to first start off with your take on the Fed's rate decision yesterday.

Brad Simpson: Well, you know that-- boy! We've got an hour. Let's do it out. OK? At the end of the day, I think you got to think about the function of what a central bank is and I think you got a little bit about the function of where we are today.

And every quarter we publish a big strategy research document, and you just happen to have me today when we're publishing ours -- I don't know -- in the next hour here or so. And it's about 80 pages long, and I think probably about 30 of it were talking about inflation and central banks. And so the bottom line is that I think you have to think about it in these terms -- that inflation for a central bank is the main thing that they're concerned about.

And I think if you look back past in time, that I would say every central banker in the world, they grew up in a world where they went to school, and they listened to the discussions with their parents. They remember the thoughts and ideas they heard about 1970s inflation over and over and over and over again, and the ills of it and how no matter what you're going to do, make sure that you're going to never have the late 1970s, early 1980s happen again.

And I think if you think about it in that context-- and in my introductory article to our publication that we did, which was called Soundproof, I have a quote from Ben Bernanke who says, you know what? You got to realize you could almost look at it -- for central bankers, it's like childhood trauma. You never forget it.

And the reality is that the things that central banks did since 2020 to today, from COVID and the Russia-Ukraine war and all the fiscal policy that has been on the background of pushing behind all this monetary policy, it's been with the simple goal -- first get ourselves through the COVID-19, then let's work our way through getting the economy back up and running again. And then since that time, let's face it -- I think we could all agree that they kept interest rates too low for too long-- and I'm not really here to be critical of that. It's just the reality is, that interest rates is like a blunt tool they use.

And now what's happened is-- inflation on the other side is, is that they're going to-- at the expense of almost anything else-- they're going to go through the process of ensuring that they take care of it. And so today, you know that they're saying they're kind of data dependent, and they're going to go day by day. You saw the 25 basis points increase by the US Central Bank yesterday. ECB came out today -- and that until they see and feel confident that inflation is eradicated, or at least back to that 2% to 3% target.

Yes, the trend is good. Yes, it looks good but I think you have to understand that impetus from them. And if you look at it in those terms, all of a sudden that starts to give you a pretty good idea.

Anthony Okolie: OK. Now I want to stay with monetary policy because-- talk to us about the trial and error method causing havoc for data and portfolio managers.

Brad Simpson: I think that's one of the things I really love about the environment we have right now is this kind of contrast. And that is, you open up a newspaper-- or if you go to any-- read any book on business today and it's all about big data. And I know in our own company here, we love the word, big data. Nothing gets people more excited than that. And my background is that of macroeconomics, and as a portfolio manager, I come from a quantitative background. So I mean, I like data an awful lot.

But one of the things we have to think about in the terms of this trial and error approach that we're taking is that the steps and the sort of things that central banks have done in the last-- well, especially the last three years, but you can almost take the last decade. And if you look at that, the sort of measures that have been taken, you don't exactly know, and they haven't exactly known what's going to happen when they do the things that they do. And so the reality of it is that what economists like to do, what quantitative portfolio managers like to do, what investment shops around the globe likes to do, is we like to take nice and tidy and neat data -- and it's always past data. And we take that data, and we extrapolate it forward to make the decisions how we're going to allocate capital.

And the issue that we have right now is, that that data that we're gathering from the past, is we're trying to extrapolate it to a future that-- in an environment that we are today that, quite frankly, we've never quite seen before. And so I think the thing that we have to understand with this is that it's kind of like high frequency. And this high frequency creates all kinds of distortions. And if you think about it in that term, is that every time we try to use this data, what we're seeing here is that it's distorting a little bit how we're looking at things.

So one of the things we love to say in the investment business-- and the origin of it is Sir John Templeton said is-- be aware of anybody who says this time is different. And the reality is, is that it's always different and this time it's especially different. And so the point in that is that we have to start becoming a little bit clearer with ourselves and a little bit more candid with ourselves is-- that we all know the future is difficult, and I think we have to know when we're making decisions-- either of trying to ascribe what's the economy going to look over the coming quarters, and then when we're trying to ascribe what do we think is going to happen in fixed income markets, our equity markets, our private markets-- I think we have to be a little bit honest with ourselves here and say that how much we can know is incredibly limited. And that's OK. I think the issue actually is not being that clear on that because you can make all kinds of assumptions and look terribly wrong at the end of the day, and that's not what you want to be.

Original Post

For further details see: