I explain why Bill Ackman wants The Fed to hike rates a lot. Bill Ackman of Pershing Square Capital Management is a famously concentrated investor in which he only invests in a handful of stocks, which is similar to Warren Buffett and Charlie Munger.
I’m guessing Bill Ackman’s investing plans seem to hinge somewhat on the Federal Reserve continuing to hike rates aggressively through 2023 based on his recent interviews with CNBC and some of his tweets. Like how “Inflation is out of control” and what he insists The Fed must do.
Bill Ackman said the economy is strong but didn’t say where he thinks the stock market will be by February 2023 to August 2023.
Since Ackman believes that raging inflation is the biggest problem for the economy, he doesn’t feel that the steps taken by The Fed have been effective enough to date.
I was surprised to hear Ackman say that since the first 75 basis point (bp) hike in June, “financial conditions have eased enormously,” which suggests The Fed wasn’t tightening enough.
Ackman discussed how the 2 year treasury bond is as a good indicator of where the Fed Funds Rate will be over the next 8 quarters. And the fact that it had been at 2.9% in early August means that the markets expected the Fed Funds Rate only to go to about 3% before The Fed might have to dial it back. Ackman said that implied no financial tightening at all.
Bill was taken aback at Jerome Powell saying at the July FOMC meeting that he was “comfortable that it had now reached a neutral level of rates,” which Bill found to be extraordinary in a world of 9% inflation.
With “the current prevailing level of rates is amping up the economy,” you can still make money off of inflation with mortgages at 5%-6% compared to inflation at 8%-9% as the value of your debt is eroding over time.
Bill Ackman says The Fed has to raise the Fed Funds Rate to at least 4% or more to bring down inflation to 3.5%-4% or less.
Ackman said that “rates are going to have to stay 4%+ for the foreseeable future for 12-18 months or so in order to kill this inflation,” which puts us at the timeframe of August 2023 to February 2024. The stock market could be falling throughout and up until these dates, which could potentially signal stock buying opportunities.
Bill Ackman’s investing strategy during this time is “if you own great businesses you can ride through a challenging time like this,” as this fall he’s planning to “own the same companies as in the beginning of the year.”
But it seems Bill Ackman would love to buy more stocks on sale when The Fed hikes rates above what the stock market wants.
If The Fed can successfully bring inflation down enough, Bill said “once people realize The Fed doesn’t have to keep increasing rates and will soon be taking rates down, it’s kind of a buy signal for markets. And so the question is how far in advance does the market predict that kind of outcome?”
But Ackman also warned that The Fed isn’t just going to take rates to 4% and see that inflation is starting to come down and immediately take rates down again, saying “they’re not going to make that mistake.”
In short, the stock markets may be in for some short-term pain but that can lead to long-term gain for us as investors.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
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