This isn’t a rerun of the 1970s, argues Jeremy Siegel, the author of the seminal Stocks for the Long Run and a professor emeritus of finance at the University of Pennsylvania’s Wharton School. The reason, he says, is that the Federal Reserve “stopped the growth of the money supply this year very dramatically.” That wasn’t the case during the Great Inflation of 1968 to 1983, when the consumer price index surged 186%, or 7.3% annually, exacerbated by two oil crises and high unemployment.
“Today’s valuations look quite attractive,” he says. “I won’t predict we’ve hit bottom, no one can, but an investor in this market may be well rewarded.”
In the ’70s, he adds, no determined effort was made to reduce the money supply until Paul Volcker took over at the Fed in 1979. He pushed the federal-funds rate over 19%; the current target is 1.5% to 1.75%. This led to two recessions but killed off stagflation and ushered in a long, stable period for inflation and unemployment.
Siegel blames our inflation on Washington’s response to the pandemic. “The money-supply growth in 2020 was the greatest in the 150-year history of data that we have,” he says. “Instead of spending programs under Trump and Biden,” the Fed should have said, “‘If you want those programs, go to the bond market.’ That’s not inflationary.” Today, there’s a lot of “pipeline inflation that has already passed but won’t get into the statistics for some time.”
We may be in a technical recession, but he sees a relatively soft landing, depending on how soon the Fed eases after the expected July rate hike. “We’re in much better shape than they were” in the ’70s.
Last Week
A Long, Hot Summer
The euro fell below parity with the dollar for the first time since 2002, Treasuries rose, and the yield-curve inversion deepened. Tuesday and Wednesday were Amazon Prime days. Stocks fell before and after the June inflation number—a red-hot 9.1% year over year, which stirred talk of a 1% rate hike—came out. But as oil fell below pre-Ukraine war levels and June retail beat expectations, stocks rallied after four days of losses. For the week, the Dow Jones Industrial Average dipped 0.16% to 31,288.26; the S&P 500 fell 0.93% to 3863.16; and the Nasdaq Composite lost 1.57% to 11,452.42.
Earnings Beat: The Banks Begin
An anxious earnings season began with the big banks. JPMorgan Chase didn’t help: profits fell 28%, deals were down, and share buybacks suspended; Morgan Stanley missed on deal revenue, but made some back in trading; Citigroup beat on revenue, helped by rising rates, and profits, but added to reserves and suspended buybacks. Delta Air Lines missed, suggesting a tough season for the airlines.
China and Covid, Again
China reimposed lockdowns in some cities as cases of the new variant spread, shutting down Macau casinos; a heat wave also baked large areas of the country. The government fined Alibaba Group Holding and Tencent Holdings on antitrust violations, a sign that the tech crackdown isn’t over yet. China’s economy barely grew in the quarter.
The Widening War
Russia cut natural gas flow to Europe through the Nord Stream 1 pipeline just before the summer maintenance break, raising fears that the taps wouldn’t be turned on again. Ukraine began to use long-range U.S.-supplied missiles, pounding Russian ammo depots in the south and air-defense systems in the Donbas. The U.S. warned that Iran was poised to ship drones to Russia, even as President Biden was heading to Israel and Saudi Arabia, both enemies of Iran.
Twitter Returns Fire
Twitter named Wachtell Lipton Rosen & Katz as its law firm, then sued Tesla CEO Elon Musk for pulling out of his $44 billion deal for the company. The case will be tried in Delaware’s Court of Chancery. Twitter said Musk’s move was “invalid and wrongful” and that Musk wanted out after business conditions worsened. Musk, who lawyered up with Skadden, Arps, Slate, Meagher & Flom, Wachtel’s longtime rival, and Quinn Emanuel Urquhart & Sullivan, tweeted: “Oh the irony lol.”
Annals of Deal Making
Bill Ackman, in a letter to Pershing Square shareholders, said he was shuttering his SPAC and returning $4 billion to investors. The reason: He had failed to find a suitable target… KKR raised $2.1 billion for its first asset-based financing vehicle. The firm has already deployed about half of the funds… Unity Software said it would buy IronSource for $4.4 billion, a 74% premium…Crypto lender Celsius Network filed for bankruptcy a month after freezing customer assets. It owes users some $4.7 billion. Celsius followed another lender, Voyager Digital , that also filed…The Wall Street Journal reported that Elliott Management took a stake of over 9% in Pinterest .
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