David Rosenberg, chief economist at Canadian wealth manager Gluskin Sheff, learned one critical lesson from the aftermath of the 1987 stock market crash – “no matter how strong the economy is, nothing is more important than Fed policy and liquidity”. In the wake of that particular crash, then-Federal Reserve boss Alan Greenspan cut rates rapidly, establishing a pattern which “came to be known as the ‘Greenspan put’”.
But investors beware: those days are over, says Rosenberg. He reckons that the new Fed chief, Jerome Powell, (pictured) is going to be a lot more like Greenspan’s predecessor, Paul Volcker. While Volcker “killed inflation,” Powell “will kill the economy’s chronic dependence on asset inflation instead of real fundamentals like productivity”.
Of course, that will be a shock for a market that has grown used to being bailed out by the central bank every time there’s a hint of a wobble. Yet with inflationary pressure continuing to build, the Fed may not feel it has any other choice but to keep raising rates, even if economic growth shows signs of cooling.
Rosenberg notes that gold has been holding its own amid the sell-off. And little wonder: “sentiment is so washed out and market positioning is its most bearish in 17 years”, meaning it doesn’t take much of a shift in attitude to send the price higher. As a result, “the technical picture on bullion is looking much better” than over the past few months.