Yes They Can...

Part 1

@CharlieLongren

As they say, hindsight is 20/20. I usually speak about events in the past and how they may affect global financial markets in the future. Understanding past market dynamics is far easier than noticing what is happening in the present. Even more difficult, still, is trying to accurately predict what will happen in the future. We can make educated guesses, but even some of the best investors are satisfied if 51% of their forecasts are found to be correct.

Many people predicted that central bank money printing would cause inflation. On November 3rd 2010 the FOMC voted to begin what, at the time, were considered extremely high levels of money printing which they later coined quantitative easing or QE. The vote was 10 to one with the one detractor being Thomas Hoenig, President of the Kansas City Fed. The Fed minutes from that meeting read…”Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”

Thomas Hoenig may have been the first to predict that the actions of the federal reserve would be inflationary and economically destructive, but he was not the last. Many economists, investors, politicians, and armchair quarterbacks have proselytize that Federal Reserve money printing would lead to unprecedented levels of inflation. In the 10 years since it seemed as though they all got it wrong.

Despite years of being wrong, or at the very least early, many of Thomas Hoenig’s disciples believe that the Federal Reserve has put itself in a position where their hands are tied; where they must keep “printing” dollars or the entire economy will plunge into a depression. Some hold the belief that the Fed cannot raise rates for fear of that plunge. (Refer To This Article’s Title).

In every year since 2010, with the exception of a brief period of tightening between 2017 and 2018, the Fed has increased their rate of monetary stimulus which reached its apex in 2021. M2, a metric the Fed uses to measure the number of dollars in the economy, has increased by over 6 trillion dollars since 2020. That is a conservative estimate of the amount of dollars of stimulus pumped into the economy, and yet until late 2021 there were no signs of runaway inflation. On the contrary, measures were so tame that theories like Paul Krugman’s MMT began to gain popularity. His modern monetary theory, or MMT, states that the government/the Fed can and should print as much money as they see fit as long as inflation measures remain low.

Maybe Krugman is right (he isn’t), but inflationary indicators are no longer low. In 2021 the consumer price index, one of the Fed’s primary measures of inflation, had its highest percentage increase since the year 1990. This time may very well be different.

Due both to inflation and to employment data, the Fed has decided that in 2022 it will increase its interest rate target and begin to reduce its balance sheet by selling on balance sheet assets such as Treasury securities. They are removing liquidity from the system thereby making it more difficult for organizations and individuals to obtain funding. This change in policy is an extremely abrupt pivot from the easy money Fed policy we have become accustomed to. If I am correct about liquidity being the main driver of economic growth since the 1970s, then this new era of fed hawkishness, tightening, and increased rates will cause all financial markets globally to sharply decline.

It is my personal policy to avoid saying or giving anything even resembling financial advice, because I am a novice. I understand that the realm of what ‘I don't know that I don't know’ is vast. However, I am not uncertain that 2022 will be highly unpredictable and the question of where to invest will only become clearer with time and hindsight. The amount of inherent risk in everything from stocks, commodities, real estate, and bonds to crypto will likely increase. It already has. And investors have responded by selling off financial assets.

The Fed has not even started their tapering, but on the announcement of their hawkish pivot the S&P 500 has fallen by over 8%. With four rate increases planned for 2022, it is likely there will be a lot of value destroyed in financial markets this year. As I explained in “The Milkshake that Brings the Bucks” and in the “Banking in the Shadows” series, Fed action will just effect the US economy. It will send shockwaves throughout the global economy, resulting in financial crises in countries all over the world. This will bring a once in a lifetime buying opportunity for those with enough cash to take advantage. In 2022 and 2023, cash is king.

Of course, I could be wrong, but we will know for sure in March.