LONDON — Do you believe in fairy tales? If so, you could probably earn good money nowadays as a financial trader or gain power and prestige as a central banker.
Investors’ optimism can be seen in the trillions of dollars staked recently on three closely related market bets. Money markets are now predicting that U.S. interest rates FF00, +0.00% will peak at below 3.5% in January 2023 and then decline starting from next April to around 2.5% in early 2024. Bond markets TMUBMUSD10Y, 2.767% are priced for U.S. inflation to collapse from 9.1% today to just 2.8% in December 2023. And equity markets SPX, -0.12% DJIA, +0.09% GDOW, -0.
The first cognitive bias is to downplay and defy geopolitics—a view summed up by Nathan Rothschild’s legendary instruction in the Napoleonic Wars to “buy on the sound of cannons.” Professional investors take pride in trading against panicky retail investors who sell their assets because of wars. Many investors accordingly believe that monetary conditions have become very tight because central banks have raised interest rates in increments of 0.75 percentage points instead of the usual 0.25 percentage points, despite the fact that rates are still much lower than in any previous tightening cycle.
…or 8%, 10%, 12%. Congress can stop spending to fuel it. 🤬