The Cambridge Weekly – 1st August 2022

Positive returns amidst negative sentiment

For a second consecutive quarter, the US economy shrank in real terms. Yet the US Federal Reserve (Fed) raised interest rates by another 0.75% last Wednesday because the US economy is too strong. We write, in a separate article below, about how the inflation picture is progressing.

Markets trust in the Fed’s tinkering

You are running a bath. The water shoots out icy cool the moment you turn the tap, and you wait for it to get hotter. The tub fills with tepid water and you start to get impatient – it has been a long day – so you turn the tap as hot as it will go. For a millisecond, you reach the perfect temperature, but that bliss quickly passes as the heat keeps rising. You turn the tap back and it is soon too cold again; switch the other way and it is yet again too hot. There is an annoyingly long lag between turning the tap and actually achieving the right temperature – so you repeat the back and forth until you get out of the tub, making it a much less relaxing experience than you hoped.

Thoughts on risk and uncertainty

As the last few years have made painfully clear, we live in an uncertain world. Events that no one thought could happen seem to be regular occurrences these days, to our collective dismay. Investing through interesting times can be a blessing and a curse, the same as living through them. Like any choice, we try to make our investment decisions based on a firm understanding of possible scenarios and their relative likelihoods. When huge once-in-a-lifetime events happen, we often need to evaluate how firm that understanding really is. When several such events happen in quick succession, that sense of uncertainty can creep higher.