High debt-to-GDP ratios, inflated corporate valuations and elevated inflation mean the Fed’s tightening “will absolutely kill demand,” said Tavi Costa, portfolio manager at Crescat Capital.
“These three macro imbalances, in my view, create major policy constraints in fighting inflation,” he said. “I don’t think the economy can really handle what we’re doing.”
The Federal Reserve hiked interest rates by 75 basis points on Wednesday, causing the Dow Jones to end 500 points lower.
“In my view, we’re going to see a bigger drop in equity markets,” Costa claimed. “I don’t think that’s an environment where you want to buy the dip.”
Costa spoke with David Lin, host and producer at Kitco News, at the Precious Metals Summit in Beaver Creek, Colorado.
A new regime
US headline inflation was 8.3 percent in August, compared to 8.5 percent in July. Costa said that “inflation is extremely entrenched in the economy today” and that it could take some time to cool down.
In particular, he cited wage growth, underinvestment in natural resources, “reckless” tax spending and deglobalization as the “four pillars of inflation.” He highlighted deglobalization as the most important factor.
“We are at the dawn of a de-globalized world that will force most developed economies to reduce their dependence on countries like China,” he said. “It will actually create demand for commodities to rebuild manufacturing bases in developed economies.”
Because of these “four pillars,” Costa said, we moved to a new economic regime.
“Currencies are traded differently,” he said. “We will see changes in correlations as we see Treasuries fall and Gold rise. We will see changes in power. Emerging markets that are resource-led economies will do well.”
Although the United States continued to see unemployment low at 3.7 percent in August, Costa hinted that labor markets could be loosening.
“Most labor market index indicators are generally lagging indicators,” he said. “I think you have to watch the margin. Vacancies are starting to go down, from very large levels, but they’re starting to go down sharply. It’s one of the biggest declines since the 2020 crash and global financial crisis.”
Costa’s research shows that labor markets decline a few months after stock markets start.
“Initial jobless claims are starting to rise,” he added. “Look at the number of layoffs we hear about all the time from big companies. That still has to be included in the [overall labor market].”
To find out why Costa’s hedge fund is up 176 percent in two years and Costa’s investment recommendations, watch the video above
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