So – Jeremy & the rest of the gang are expected in a couple of hours, and for the first time in over a year they are expected to stand down from, what some commentators have labelled, their unrelenting quest to crush inflation. Go figure. With Core Inflation running at 5% year-over-year, these people seem to somehow assume that 5% short rates are going to suppress demand and miraculously achieve a return of inflation to their target of 2%. Go figure. In this context it’s worth noting that both 3-month and 6-month annualised rates of inflation are also running at – you guessed it – 5%. With that quite important statistic at hand, some people still think Fed is winning the battle against inflation. Go figure. What is blatantly obvious to all of us running risk in the market, but still somehow seems to escape most commentators (cheerleaders is probably a more appropriate term), is that getting headline inflation from 8% to 5% is a hell lot easier than getting it from 5% to 2%. Particularly as crude has gone from $120 barrel to $70. Call me crazy, but in my world I don’t think we’ll see WTI (or Brent) at $40 barrel by the time the 2024 Giro’d’Italia has finished, and only those dreaming of, or in, pink will subscribe to that particular fantasy of inflation getting there without further help from price declines in commodities. In a physical world governed, and a financial world shaped, by Climate Change and increased resource scarcity, that is extremely unlikely to happen. Back to you Jezza.

Given that the Fed is not really trying too hard to object to what’s been priced into the market, it begs the inevitable question – is their inflation target really 2% any more ? It’s a complex question and perhaps something that does deserve its own write-up, but without making this pre-fed commentary too long, I would simply and strongly suggest that it’s not (just have a look at their one and two year rate expectations). There are several good reasons for why it has ceased to be the case (was it really ever ? Except on the downside of course….), and why talk is ultimately cheap. Let me make it abundantly clear in case you haven’t fully understood – action speaks louder than words, and this is not a Federal Reserve who takes strong, pre-emptive action.

Hence, they will not tighten again tonight, even though the numbers suggest they should and it would allow them to clear the desk. By that I mean that they could credibly tell the market they’re done for the moment and have now earned the right to see how it all pans out over the next couple of months by having pushed the real risk-free rate into positive territory – albeit marginally. Much of the autumn could then instead be spent searching for and picking the Thanksgiving turkey. A tantalizing prospect for a central banker.

I could of course be wrong. Maybe the small, but vocal, platoon of hawkish dissenters within the FOMC can make the case for a pre-emptive strike by rightly claiming that it might stabilize and perhaps even lower the yield at the back-end of the treasury curve. I for one firmly believe that’s the case. Without that strike, the wet fog of further, and larger, increases down the road, if numbers do not co-operate, will forever continue to hold fixed income investors hostage at gunpoint and underpin bond yields. Somehow I don’t see that happen, because action speaks louder than words.

Until the Fed gets ahead of inflation and the expectations of it, you cannot invest in bonds. If you cannot invest in duration, you cannot really buy stocks either because ultimately equities are nothing more than a really long-duration bond. You can always own the Bond or some Spoos for a trade, but as an investment, both asset classes are basically uninvestable until the genie of inflation has been put back in the bottle. That’s a tall order. Until then you can only hold those golden, battle-hardened names of companies producing genuinely needed goods and services. That’s what I’m doing (having earned a paltry 2% excess return over cash in the long-only book this year I should add), while sleeping well at night. Well done to those of you who managed to front-run the AI-fueled craze of FOMO in the FAANG(+)’s (only one of them is on my list by the way…) and now feel a million dollars. It’s here worth re-emphasizing how much those stocks have driven the overall market, just like a select group of companies have in all previous bubbles. If you don’t believe me just compare the performance of the equal-weighted S&P500 with the headline index (all nerds should repeat the exercise to spot previous bubbles…). In the meantime, enjoy the gift that keeps giving and keep shedding stocks into these inevitable spikes and set shorts if you are able to. You don’t build a base for a durable stock market advance from here.