High debt-to-GDP, excessive company valuations, and elevated inflation mean that Fed tightening is “going to absolutely kill demand,” said Tavi Costa, Portfolio Manager at Crescat Capital.
“Those three macro imbalances create, in my view, major political 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 increased its key interest rate by 75 basis points on Wednesday, causing the Dow Jones to close 500 points lower.
“In my view, we’re going to see a bigger decline in equity markets,” Costa claimed. “I don’t think this is an environment where you want to be buying the dip.”
Costa spoke with David Lin, Anchor and Producer at Kitco News, at the Precious Metals Summit at Beaver Creek, Colorado.
A new regime
US headline inflation was 8.3 percent in August, down from 8.5 percent in July. Costa said that “inflation is extremely entrenched in the economy today,” and could take significant time to cool.
In particular, he named wage growth, under-investment in natural resources, “reckless” fiscal spending, and de-globalization as the “four pillars of inflation.” He highlighted de-globalization as the most important factor.
“We’re at the beginning of a de-globalized world, which is going to force most developed economies to reduce their reliance on places like China,” he explained. “It’s actually going to create demand for commodities in order to rebuild manufacturing plants in developed economies.”
Because of these “four pillars,” Costa said that we have transitioned to a new economic regime.
“Currencies are going to trade differently,” he said. “We’re going to see changes in correlations, like we’re seeing Treasuries declining and gold rising. We’re going to see changes of powers. Emerging markets that are commodity-led economies will do well.”
Although the United States continues to experience low unemployment at 3.7 percent in August, Costa suggested that labor markets could loosen.
“Most gauges for labor market indices, in general, are lagging indicators,” he said. “I think you need to be looking at the margin. Job openings are starting to decline, from very large levels, but they’re starting to decline in a big way. It’s one of the largest declines since the 2020 crash and the global financial crisis.”
Costa’s research shows that labor markets decline a few months after equity markets start to.
“Initial jobless claims are starting to rise,” he added. “Look at the number of layoffs we’re hearing about, all the time, from major companies. That’s still yet to feed into the [overall labor market].”
To find out why Costa’s hedge fund is up 176 percent over two years, and what Costa’s investment picks are, watch the video above
Follow David Lin on Twitter: @davidlin_TV
Follow Kitco News on Twitter: @KitcoNewsNOW
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/or damages arising from the use of this publication.