Joel Elconin – A Look Into 2022 for US Markets, Inflation, Fed Policy and Covid
Joel Elconin, Co-Host of the Benzinga PreMarket Prep Show and Editor of the PreMarket Prep website joins us to look ahead to some of the key drivers moving into 2022.
We start with US markets that are making another push to all times highs right before year end. We focus on investor positioning and sentiment. In terms of inflation we recap the data from this year and expectations heading into the new year. Wrapping up the call we discuss Fed policy (which will be a major focus all year) and Covid related news that may impact markets.
Click here to visit the PreMarket Prep website and keep up to date on what Joel is watching for the markets.
As we do some end of year navel gazing at where we are let’s not forget how we got here. I came across this article over at Politico about a man called Fred Hoening, a former member of the Fed from Kansas City. The article is well worth a read. I could cut and paste the whole thing but a couple of passages stand out:
“While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.
On all of these points, Hoenig was correct. And on all of these points, he was ignored. We are now living in a world that Hoenig warned about.
The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession. ”
“As a bank examiner, Hoenig realized another very important thing. Easy money policies don’t just drive up the price of consumer goods, like bread and cars. The money also drives up price of assets like stocks, bonds and real estate. During the 1970s, low interest rates fueled demand for assets, which eventually inflated asset bubbles across the Midwest, including in heavy farming states, such as Kansas and Nebraska, and in the energy-producing state of Oklahoma. When asset prices like this rise quickly, it creates that dreaded thing called an asset bubble.”
“Hoenig retired from the Fed in late 2011. As he predicted, the round of quantitative easing he voted against was just the beginning. By 2012, economic growth was still tepid enough that Bernanke argued that more quantitative easing was in order. This time, the Fed printed roughly $1.6 trillion. The Fed also kept interest rates remained pegged at zero for roughly seven years, by far the longest stretch in history (rates had touched near-zero in the late ‘50s and early ‘60s, but stayed there only briefly).
The Fed tried mightily to reverse its easy money programs, but largely failed to do so. The central bank tried to raise interest rates slowly, while withdrawing some of the excess cash it had injected through years of quantitative easing. When the Fed tried to withdraw this stimulus, markets reacted negatively. In late 2018, for example, the stock and bond markets fell sharply after the Fed had been steadily raising rates and reversing quantitative easing by selling off the assets it purchased (a maneuver it dubbed “quantitative tightening”). Fed Chair Jay Powell quickly halted those efforts in a move that traders dubbed the “Powell Pivot.”
For Hoenig, the most dispiriting part seems to be that zero-percent rates and quantitative easing have had exactly the kind of “allocative effects” that he warned about. Quantitative easing stoked asset prices, which primarily benefited the very rich. By making money so cheap and available, it also encouraged riskier lending and financial engineering tactics like debt-fueled stock buybacks and mergers, which did virtually nothing to improve the lot of millions of people who earned a living through their paychecks.”
“Hoenig isn’t optimistic about what American life might look like after another decade of weak growth, wage stagnation and booming asset values that primarily benefited the rich. This was something he talked about a lot, both publicly and privately. In his mind, economics and the banking system were tightly intertwined with American society. One thing affected the other. When the financial system benefited only a handful of people, average people started to lose faith in society as a whole.
“Do you think that we would have had the political, shall we say turmoil, revolution, we had in 2016, had we not had this great divide created? Had we not had the effects of the zero interest rates that benefited some far more than others?” Hoenig asked. “I don’t know. It’s a counterfactual. But it’s a question I would like to pose.””
See it all at: https://www.politico.com/news/magazine/2021/12/28/inflation-interest-rates-thomas-hoenig-federal-reserve-526177
Hi Mike. Yeah, I had poated this artcle over on the other blog today. Good stuff!
I just saw this interview piece come out, but it gets into exactly what was discussed with Joel, when I asked if we’d see a rotation out of Growth and into Value in 2022. This seemed worth posting here just for posterity’s sake.
«The Trade for 2022 Is Going to Be an Epic Rotation into Value Stocks»
Christoph Gisiger – The Market – 26.12.2021
“Larry McDonald, creator of «The Bear Traps Report» and New York Times best-selling author, expects a colossal shift from growth to value stocks in the face of elevated inflation. He also explains why he believes gold and emerging markets have big upside potential.”
Here is an excerpt from that Christoph Gisiger & Larry McDonald piece linked above:
> “Mr. McDonald, when it comes to the market outlook for the coming year, everything revolves around inflation. What are your thoughts on this issue?”
>> “Everybody knows that inflation is going to come down. On a year-over-year basis, these high levels of price increases are just not sustainable. But here’s the problem: If inflation normalizes at 2.5% to 3.5%, or maybe 4%, a lot of money is in the wrong place.”
> “What do you mean by that?”
>> “There is a ton of money in growth stocks like Tesla and Nvidia, and what’s happened is that the tertiary parts in this segment have already given away, particularly cloud-software stocks and stocks that are owned by the ARK ETFs. Those stocks are all big deflation bets. But if you have sustained inflation the net present value of future cash flows is worth a lot less for growth stocks, and that’s why they are underperforming. Teladoc for instance, a remote healthcare provider, is down 70% off the highs. Yet, it’s still trading at 14x sales. So if inflation normalizes at a higher trajectory, it’s going to force trillions of dollars out of growth stocks into value stocks.”
> “What does this imply for investors?”
>> “The trade for 2022 is going to be an epic rotation into value stocks.”
SPQ(PE) : https://tinyurl.com/2vc9pznu
Turnaround Tuesday across the board?