Inflation: ‘The Fed is in a huge box,’ strategist says

Ted Oakley, Oxbow Advisors Managing Partner, and Michael Vogelzang, CAPTRUST CIO, join Yahoo Finance Live to discuss the Fed, inflation, and the outlook for markets.

Video Transcript

- Let's bring in our market panel to digest all that we've seen with today's market movers. There's Ted Oakley, Oxbow Advisors Managing Partner, and Michael Vogelzang, from Capital Trust. He's their CIO. Gentlemen, thank you for joining us today. Ted, I want to first start with you. We tend to keep seeing these sort of races to the close, ending in the declines. What are you watching in terms of signals as to what's really happening here?

TED OAKLEY: Well, I think what's happening is-- and you get this in bear markets. You know, everybody wants to try to find the bottom. And so, you open up in the morning on the plus side because they see it closed negative the night before and they keep on trying to catch that. They never can, though, because it keeps on going. But I think that's what you're into now. And it's fairly classic. You've seen it. I've seen it over the years where they chase it in the morning and then in the afternoon it turns on-- it turns on them, and you take it back down again.

- Michael, stocks weren't the only things that pulled back today. Now that we've seen crude oil prices really violently pull back from a 14-year high just earlier this week, do you think we've seen the peak in the run up for energy commodity and stock prices? Or could we potentially see a rebound next week?

MICHAEL VOGELZANG: Well, you tell me what happens in Ukraine and Russia, and where does Putin go next, and then I'll tell you where the oil is going to go. You know, I think what we're seeing is the world trying to come to terms with the effective shutdown of the Russian oil complex, and if not now, it'll be soon at some point, at least in the Western liberal democracies.

So I think, I think, you know, trying to find other sources of crude. We're talking to Venezuela, we're talking to Iran, and all the other things. So that's going to stabilize the price, of course. But the problem is if you get a continued and further activity in Eastern Europe, militarily, I think you'll see the price of oil remain high and potentially go higher. It's really just hard to predict at this stage.

- Ted, you know piggybacking off of that, is oil and the impact that the oil prices could have to everything from prices at the pump, but all the way to where companies who are relying on some of that oil to power their supply chains and energy production, even, how that will impact their forecasts, their outlook? Because we still haven't heard what companies are set to signal as a result of their earnings and some of those forecasts with relation to these new prices, even if they are companies that purchase their barrels well in advance, in advance, excuse me.

TED OAKLEY: Well, I would say this. We really felt like you know, the first and second quarter, the numbers would come in not as robust as they were last year anyway, for most companies. And this just adds more, pardon the pun, fuel to the fire, so to speak, for that. And we still expect the same thing, that if you listen to the calls in the last two or three or four or five weeks, every single call talked about that. And so, I suspect that goes on in the second quarter.

- And Michael, I want to look at what we might see happen with the Fed. Obviously, next week, we're expecting a 25 basis point increase there. A lot of concern that we saw the markets still didn't seem to be that settled about what the Fed might do next. How do you plan around this? How do you position your portfolio when you're not really sure how aggressive the Fed will be?

MICHAEL VOGELZANG: Well, it's just one of the variables. I think the Fed is in a huge box so there's two questions there. One is, I think the Fed, Federal Reserve will have a very difficult time threading the needle here between, between trying to slow inflation. Which, you know, it really doesn't control logistics, it doesn't control the price of oil, and I'm not sure the 25, or 50, or 100 basis point increase in short term interest rates is going to make much difference there. Yet, they have to do it to signal the resolve.

And yet, to Ted's point, we were expecting earnings to be slowing down substantially anyway in 2022, probably 8% or 9%. Now, if oil stays at $120, we could undershoot those numbers even. So all of a sudden, you know, you've got a slowing economy. You have high oil prices and a Federal Reserve that's raising interest rates. So we're taking the under on the rest of the year from the Federal Reserve in terms of how much and how far they can go to raise rates. But it's a really difficult box the Fed's in. It's going to take all the skill of Jerome Powell and the rest of the committee to figure out how to accomplish their objectives.

- Ted, earlier today Goldman Sachs said it sees 20% to 35% odds of a recession in the next year, as implied by the slope of the yield curve. What do you think about that given where we are right now with this economic backdrop?

TED OAKLEY: Well, I'd have to agree with it. I would actually put the odds higher than that. I would say at least 50%. But one out of two. But I certainly agree with the idea that they have. If you just think about it, the 70% coming from the consumer, all of a sudden they're going to have almost $5 gasoline, food is going to be 30% higher. It's going to cost-- their whole thing is going to cost them $3,000 to $4,000 more per year. So we see, we see that as a slowdown, really, from the consumer. So we'll see if what it comes out that way. But we're thinking that you, you have a great shot at least having one down quarter, maybe two.

- You know, as we're thinking about everything that took place this week, Michael, I can't help but think back to where cryptocurrency traders may have also been trying to kind of place their bets for the long term, especially considering the new executive order that's come through from the administration for crypto investors out there. Is this kind of a make or break type of week, as you see it, for cryptocurrency as now we're starting to get more of that movement on what a task force could look like, what regulation and more attention for the space could look like as well?

MICHAEL VOGELZANG: Yeah, well, we think that, we think the crypto space, in order to join the big kids' table at Thanksgiving is going to have to be regulated. Right? It can't be a sort of dark corner of the financial markets forever, not if it's going to be taken seriously as a, as a as a way to transact. So you know, we welcome that. I think it's actually a really good thing. I think it will make it more investment grade, if you will. So I don't know if this week is the important part.

I think a much bigger question, or a much bigger point, sometimes, you know, in our business we can miss the forest for the trees. And you know, let's, let's think about what's happening here. We've gone from a 10-year deflationary regime with quantitative easing across the globe from almost every central bank on the planet. And over the last three to six months, now, now sort of turbocharged with the war in Ukraine, we're now in a tightening cycle with inflation that's getting worse and hotter. And we're seeing central banks around the globe begin to tighten.

That has fundamentally changed the dynamic around risk assets, fixed income assets, cryptocurrency, it's a reason gold is behaving so nicely. Right? These are big regimes. And I know, I know, you know, news cycles are short and people want to talk about what's going on today. But I think for investors, you need to pay attention to what's actually happening in the long cycle here. And that is, this is clearly, clearly a regime change from a deflationary, low interest rate, free money environment to something that's not that anymore. So I think that's going to have as much to do about crypto and where crypto heads in the next three to six months as anything.

- And Ted, just quickly, I want to bring you in here. We see a lot of retail investors continuing to hop in and out of crypto, but we're also seeing a lot of them buying the dip, and then, of course, seeing another dip. How would you advise retail investors to really position themselves in this sort of environment?

TED OAKLEY: Well, I think in regards to crypto, in and out, I think that was your question. If it had to do with the market I can answer that too, but if it had to do with crypto, I think the thing about it is is that this idea, you know a number of years ago that it would be a currency replacement is not going to work because it's too volatile, number one. But then if you go down and look down through the graphs of all of the 9,000 or so cryptos, and I pulled up 40 or 50 of them, they're all down. They're all down since November. And so, they can jump in and out if they want to, but by and large, they're losing money. And so, I think that's the problem for retail investors. They haven't been up against something like this and if it's extended for a long time I think it's really be a problem for them.

MICHAEL VOGELZANG: But uh, by the way--

- Michael, leave it there for now. Oh, go, go ahead please.

MICHAEL VOGELZANG: Yeah, just quickly, I mean, by the way, November is when the Fed began to tighten and started this talk about quantitative tightening. Right? So, again, I think it's not a random event that that's when crypto began to head down. And I think investors need to worry about that. - Absolutely something we will be watching with the Federal Reserve's next decision coming out next week. Ted Oakley is Oxbow Advisors' Managing Partner, and Michael Vogelzang is CAPTRUST's Chief Investment Officer. And we thank you both so much, and have a great weekend.

- It's been two years since COVID19 spread in earnest across the US, sparking stay in place restrictions that have only just recently begun to get lifted. Workhuman CFO Scott Dussault joins us after the break for a discussion about how the workplace has been altered, in some ways permanently, amid the pandemic. That's next.

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