Weekend reading: Merry Christmas from the Federal Reserve


What caught my eye this week.

Perhaps Jerome Powell should do a stint on Strictly Come Dancing when he retires from the US Federal Reserve?


The Fed chair would surely be an audience favourite. No dull waltzes or clunky rumbas from him. Think more the quickstep, with its rapid movements and sudden turns.

Because after hiking the US Fed funds rate at a the fastest clip in modern history, Jerome has suddenly pivoted.

A few weeks ago he wavered when put on the spot about whether US rates would have to rise further.


But this week he spun. The Fed is done.

Joy to the World

Well, probably. You never quite know what will happen on the dance floor – it’s an interaction not a solo show, after all – and we can’t be certain that rates have been lifted enough to tame US inflation for sure.

But it looks that way and markets seem to have made their mind up.


Here’s the yield on the US 10-year Treasury – perhaps the single most important metric in the investing world:

Source: FT

At the end of October the US 10-year yield was tickling 5%. While inflation turned long ago, the Fed still didn’t seem convinced that it had definitely seen off a price spiral. Everyone was gloomy.

But six weeks later and the yield is down by a full percentage point! If this is a head fake then we haven’t seen the like since Yoda tried to convince Luke he was just another space fraggle.

The equity markets seem persuaded. They’ve been flying for a fortnight:

Source: Google Finance

Then again the US indices have been advancing all year – mostly thanks to the very largest tech stocks. The S&P 500 is now up 23% and the Nasdaq by 43%. The damage inflicted by the 2021-2022 rout is mostly repaired, at least in nominal terms.

Of course the FTSE 100 is under-performing in this latest rally. Indeed it’s barely positive for the year.

But that’s almost reassuring. Seeing the UK’s ever-moribund index topping the leaderboard in 2022 was the investing equivalent of a dread blood moon.

Go Tell it on the Mountain

For what it’s worth I agree inflation is probably yesterday’s news, at least in the US.

Money has become much dearer over the past 18 months and the pain has been widely felt. Many commentators claimed the US needed to see a big recession to undo the supposed ‘excesses’ of the pandemic era. But I’m not convinced that historical comparisons were very useful this time.

I always sided with the argument that inflation was mostly driven by supply shocks caused by unprecedented rolling shutdowns around the world in response to Covid. Much more so than by low rates and pandemic support from governments.

The latter was particularly unconvincing, and seemed a politically-motivated charge. Of course some governments pumped cash liberally into their flailing economies, but others didn’t and the whole world got inflation just the same.

Anyway it’s not like fiscal support threw gasoline onto a raging bonfire. Has everyone forgotten the zombie state we were living in for most of 2020 and well into 2021? Talk about depressionary forces.

My economic metaphor throughout the pandemic was of a cranky machine juddering and spluttering as it lurched in and out of life. I had a particular machine in mind here – an ancient ‘collator’ that we used to stitch together the pages of my student newspaper. If that machine could moan so much in just an evening, it’s no wonder that just-in-time supply chains foundered from worldwide commotion.

Moreover 20 years of reading company reports means I’m very familiar with how a single supplier going bust or a flood at a warehouse can derail a firm’s operations for months.

So yes, China going offline for long spells probably gummed up the works.

Still, I was in camp ‘inflation is transitory’ and it wasn’t. At least not over the timescales people were using. So no cigar.

In the history books, our recent spurt of inflation may one day look like a blip. But it hasn’t felt that way – not in our portfolios or at the supermarket.

Hark the Herald Angels Sing

Who knows what this all means for our portfolios? US markets look quite expensive again and the rest of the world reasonable value. So it’s back as you were on that score.

As a stockpicker I’m finding a UK market littered with apparent bargains. Some of these cheap shares and discounted trusts will be holed below the waterline, but the sell-off has been too widespread for this not to feel to me like an opportunistic time to buy.

And then there’s fixed income. This time last year I reminded readers that the steep sell-off in bonds we’d seen was not a reason to avoid bonds in the future. If anything the opposite, as higher yields promised better returns to come.

Indeed if inflation falls faster than expected in the UK then gilts could put up very nice returns in 2024.

I still suspect we have a stickier inflation issue than the US thanks to our own self-inflicted troubles, but nevertheless we could eventually see (relatively) striking returns here, especially from longer duration assets.

But the thing about the future is it’s uncertain and confounds.

My self-proclaimed insights into inflation and the rocky road to come in early 2022 didn’t stop my portfolio getting shellacked. Equally, at today’s valuations US inflation could hit target and rates could even be cut – and US shares might still go south.

As ever it’s a long-term story that most investors are better confronting with a plan not hunches. Keep investing through thick and thin, stay diversified, and rebalance as required.

If you want excitement, try the tango.

Jingle Bells

This is our last regular post until Weekend Reading on Saturday 30 December. I’ll have a Moguls post out next week for the hardcore though, so look out for that if you’re a member.

In fact this feels like a good time to thank everyone who has supported us by becoming a member. You’ve had some decent additional content – especially from my co-blogger – and enjoyed ad-free browsing on the website. We’ve earned a few extra quid that is making this site more sustainable at last.

We’re not quite there yet. But presuming you don’t all cancel and we continue to sign-up new members at the current rate we should hit our target by summer. A big relief after 17 years of blogging without a viable business model for us.

You know what to get us for Christmas!

Thanks too for reading this post and all our others in 2023, for directing friends and family our way, and for the thousands of comments over this year that have often added as much value as anything we wrote.

Enjoy the festivities, wherever and whoever you are!

From Monevator

Should you build an index-linked gilt ladder? – Monevator

From the archive-ator: Debating FIRE – Monevator


Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England holds rates at 5.25% for third month – Sky

UK economy slowed in October as higher rates and bad weather bite – BBC

Hargreaves Lansdown and AJ Bell shares slump on FCA customer cash warning – Proactive Investors

Ofgem to add £16 to energy bills to help suppliers recover £3bn in bad debts – Guardian

Halifax and Nationwide both predict falling house prices in 2024 – This Is Money

Next UK election set to be the most unequal in 60 years – Guardian

Big financial news site using AI to copy competitors wholesale – Semafor

Almost half of Gen Z think financial compatibility more important than looks – B.I.

Sydney man dubbed ‘The Annihilator’ wins world Excel championship – Guardian

Can Japan’s legendary savers spark a stock market boom? [Search result]FT

Products and services

Freetrade launches Treasury Bills offering a 5.2% yield – This Is Money

Mastercard and Visa face post-Brexit fee cap – BBC

Get £100-£200 cashback when you open an account with Interactive Investor. Terms apply – Interactive Investor

Four financial gift ideas for kids this Christmas – Which

Mortgage lenders cutting rates as gilt yields tumble – Evening Standard

Hargreaves Lansdown new cashback offer for pension transfers, with the largest pots eligible for £3,500. Terms apply – Hargreaves Lansdown

How to use a credit card without harming your credit score – Which

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

How to save money at Waitrose – Be Clever With Your Cash

Homes for sale near English village greens, in pictures – Guardian

Comment and opinion

Charts to fit any story and a story for any chart – Klement on Investing

What’s next for first-time buyers? [Search result]FT

Better and better – Humble Dollar

All-time highs – Fortunes and Frictions

Pasta, pizza, and passion – A Teachable Moment

Stocks outperform bonds by less than you think [Search result]FT

Fixing your mix – Humble Dollar

How will equity markets perform in 2024? – Behavioural Investing

Eight steps to getting your affairs in order – RockWealth

The advantage for stocks when inflation rises [US but relevant]Morningstar

Naughty corner: Active antics

The mystery of Britain’s dirt-cheap stock market – The Economist via Yahoo

Markets are becoming less efficient not more, says AQR [Search result]FT

The illusion of the small-cap premium – Finominal

2024 outlook for private markets [PDF]BlackRock

Bitcoin is earning its place in a balanced portfolio – Advisor Perspectives

Kindle book bargains

Dead In The Water by Matthew Campbell – £0.99 on Kindle

When McKinsey Comes to Town by Walt Bogdanich – £0.99 on Kindle

The Birth of Netflix by Marc Randolph – £0.99 on Kindle

A Kidnap Negotiator’s Guide to Influence and Persuasion by Scott Walker – £0.99 on Kindle

Environmental factors

Wild pigeon chase – Noema

Welcome to Hawaii, the extinction capital of the world – Vox

Is Costa Rica’s green halo fading? – Guardian

Research suggests investing in polluters yields higher returns – Alpha Architect

Moving into the agrihood – Modern Farmer

Renewable energy investors should see green in Africa – Institutional Investor

Future of media mini-special

Tensions between macro and micro-culture will turn into war – The Honest Broker

How journalists can win people back – The Walrus

Rising interest rates rock billion-dollar bets on music [Search result]FT

Off our beat

Routine kills a man – Life After The Daily Grind

Colonising space will be more difficult than anyone expected- Inside Hook

Will new tech end the need for human pregnancy? – The Walrus

A review of Number Go Up, a crypto history – Marginal Revolution

Inside the returned goods industry – The Atlantic [via Abnormal Returns]

You only die once – We’re Gonna Get Those Bastards

And finally…

“One major flaw inherent in the Sharpe ratio is that the risk component of the measure (volatility) does not distinguish between upside and downside volatility. In regards to the risk measure, large gains are viewed as equally bad as large losses, a characteristic that completely contradicts most people’s intuitive notion of risk.”
– Jack D. Schwager, Unknown Market Wizards

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