“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”  – Fed Chairman, Jerome Powell Jackson Hole Speech August 26, 2022

Boy, that pain escalated quickly. Markets, both equity and fixed income, finally took Chair Powell at his word as investment sentiment shifted dramatically this quarter. Prior to the Federal Reserve’s annual August retreat in Jackson Hole, the U.S. equity market had rallied 17% from the June lows thru mid-August. For some reason, the markets sensed, incorrectly, the Fed was going to moderate its interest rate increases. Fed officials, especially Chair Powell, thought market participants were too complacent, misreading their intentions to slow the economy to combat high inflation. This perceived “pivot” was making the Fed’s job harder. Powell decided to send the markets a message and tossed the punchbowl into one of the Teton’s beautiful mountain streams.

Then the markets woke up to the fact that Chair Powell was becoming Mr. Tough Guy, a la Paul Volker, and the machines kicked into gear, dumping stocks, bonds, and crypto, indiscriminately right up until the market close at 4:00 pm Friday, September 30. To make matters worse this quarter, central banks around the world also moved to combat the effects of rising inflation as banks from South Africa to Norway raised rates. When the Bank of England raised rates for the seventh time in a row, things started to break. The risks of a significant policy mistake leading to a global contagion started to heighten. Currencies started trading widely, and the British pound cratered to its lowest point in 37 years. Long-term U.K. Government bonds, or Gilts, flash crashed, losing a third of their value in four days going into the end of the quarter. While world markets were getting unstable, the U.S. dollar was soaring in contrast, along with U.S. Treasury yields, triggering the quantitative trading algorithms used by the massive macro commodity trading advisors (CTA’s) to drive ETF and index funds to dump stocks and bonds. The cherry on the top of the sundae of pain was a scary echo from 2008, another possible “Lehman moment” as fears surfaced that Credit Suisse, a globally systemically important bank was on the brink of collapse.



Read our full investment commentary and letter to clients by downloading the third quarter 2022 letter.