— “Think the Fed’s already tightening? Not so fast.” (Barron’s)
— As Omicron fades into the dust as a market disrupter, inflation and interest rates will return as the the preeminent negative market obsessions. This should not be a deal breaker for the market.
— Thoughts on 2021 and 2022
My sub-heading above is the title of an article published Barron’s Up and Down Wall Street column last weekend. You will need a WSJ or Barron’s subscription to view it. I will try to summarize.
The author is Randall Forsyth. You who are regulars at Kort Sessions will recognize the name as someone who I have raked over the coals in the past for his unwarranted negativity and who never has a good thing to say about one of the greatest bull markets in history. This goes back almost nine years. While the early sections of this week’s article look to be a departure from the norm, he does not vary from his normal routine. It is bad news for investors.t
Reversing QE in 2022; The markets next big worry
Forsyth posits it is way to early for people to be saying that the Fed has already begun the tightening process. Tapering QE is not tightening. “Second, the widely anticipated lift off in its short-term interest rates policy will be far from a tight monetary policy.” Then he lowers the hammer with cautionary comments about the reversal of Quantitative Easing (the next big obsession), pulling liquidity out of the system (reducing the Fed balance sheet, selling bonds and CMOS). This is something he will worry us about ad infinitum in 2022. Then he backs up the hearse:
“More provocatively, Waller (Christopher J. Waller, a new Fed governor with great policy chops)said the process of reducing the size of its balance sheet (that is, draining the metaphorical monetary tub) could start next year, which is a lot sooner than most Fed watchers and market participants assume.”
“I don’t see any reason to delay balance sheet adjustment,” he said. “I think we can go much sooner and much faster” than the Fed did in 2014, he added, as our colleagues at MarketWatch reported.
According to one of Forsyth’s sources this time table would be a big surprise. He did not say “negative surprise” but you can bet he thinks that it could tank the market.
I HAVE TWO QUESTIONS FOR MR. FORSYTH AND ALL THE BEARS WHO WOULD SEIZE ON THESE COMMENTS AS PRECURSORS OF BAD THINGS HAPPENING: WHY IS THE FED BALANCE SHEET SO OVER-THE -TOP BLOATED? MY ANSWER IS BECAUSE WE WERE DEALING WITH THE FINANCIAL CRISIS AND COVID EMERGENCIES. MY SECOND QUESTION IS WHERE’S THE EMERGENCY?
My take is that there is so much liquidity in the system it will take a long time before shrinking the balance sheet will be a material problem. Lots of good copy will be wasted on it. Bad news sells. In the final analysis shrinking the balance sheet is overdue, necessary and to be expected. It is not a reson to sell stocks.
A look back at 2021 and forward to 2022
This is how I closed my last post of 2020–The market floats in a sea of mines:
Regarding the goose that lays those golden eggs (the stock market), my view is that with all the stimulus and zero interest rates the secular bull market continues but with a continued rotation away from the HAVES (BigTech) into the great mass of HAVE-NOTS (cyclicals, value and small cap). I embrace that change going into what could be a very fun year. (kortsessions.com, 12/29/20)
2022 looks like a continuation of 2021. Rates will be heading north on the back of higher inflation and a return to a non-emergency stance on the part of the Fed. This will be a head wind for higher multiple stocks. The continued effects of the stimulus programs recirculating through the economy, tight labor markets (significantly higher wages for our lowest paid workers who will spend every dime–“More than half of US states to hike minimum wage in 2022, but employers moving faster” CNBC 12/29/21) and supply chains untangling should augur well for a strong 2022. Cyclicals, value and small cap should continue to lead the parade.
As is always the case, your thought and comments are very much appreciated.
Thank you so much for your attention and readership. I want to wish you and yours a very healthy, prosperous and happy new year!