A Contrarian 2022 View
March 24, 2022
What we are talking about here is a Fed that is trying to deal with an embedded structural inflation that is the result of 40+ years of voodo economics. These are the compounding effects of supply side inefficiencies and resulting QE and Fed Balance sheet growth, plus government debt issued in attempts to paper over mis-management.
Forty years of Voodo economics..
Current market view …
Currently in early 2022 the Markets seem to be succumbing to the story of tail risk inflation based around supply chain and war related energy issues. The Fed says it will fix everything with 3 fifty point hikes or maybe 7 twenty five point hikes. In that regards the market showed its allegiance to not fighting the Fed by front running the hikes over the past couple of weeks.
Market Interest rate hikes are over…
So the hikes in effect are over in the market and the yield curve is sitting ass-backwards to the long term problems that are really at issue, the government debt and 9.0 T Fed Balance sheet issues.
Current FED policy will fail…
In my view, the current Fed policy will fail, inflation will not go away until the whole 40-year voodo supply-side regime is toppled. The Fed will strongly resist this kind of action as it would mean a depression economically and a stock market crash of historic proportions. But what if they lose control eventually, looking out a year or so, things look rather dire.
So what happens now in early 2022 as we wait for all this to evolve?
With higher interest rates you cannot buy bonds, you cannot buy Real Estate.
And what about the real economy?
The real economy is kind of in the background. Rising interest rates will put pressure on activity. The Atlanta Fed’s GDPNOW forecast is at 1.3 % GDP growth estimate for the first quarter, down dramatically from prior quarters. One will need to follow the regular monthly reports on consumer confidence, industrial production, retail sales, along with CPI and PPI to see if the FED may moderate interest rate hikes going forward.
In reality however, there are two things driving the markets, the Fed interest rate activity and the excess funny money funds left over from prior Fed Balance sheet activity.
Before we look at stock market trading, commodities deserve a look.
Commodities have been on an upward run for the past few months as many traders have used them and the stocks related to them, the energy and AG areas as places to hide and push during this period when stocks were declining and consolidating. My view is that this area, while in a long-term bull run, is probably going to run into some severe headwinds over the next three months. Conveniently for them, the FED is not much of a factor
Next, stock Market sentiment is important as the Bulk of current stock investors are mildly to strongly negative..
Currently investor and trader sentiment is very negative, they are looking for traditional 30 percent cumulative declines in the major averages because of interest rate hikes. Problem is the majority of the longs in the market are the buy and hold retail and pension fund crowd who will sit out any traditional crash.
What does one do in stocks then ?
That to me means you will have primarily a speculative short setup in the stock markets. How does one deal with that situation? To me it seems a bullish posture will allow one to use both, the influence of excess balance sheet liquidity, plus the short covering of the negative speculative crowd. This will be a hyper-continuation of the “what is value” Bubble. More likely this will be the final thrust of the 38.6-year Macro Cycle. Prices in this coming move will likely well exceed highs made in late 2021, and maybe by unbelievable magnitudes.
In summary, this is a contrarian view, obviously, one that will probably be a nail biter as things evolve.
I have a couple of early morning adds to the review and comments posted last night.
First, I went back to our archives and read all the Blog posts we have put out since January 25th 2022, the point at which we covered our short positions in SPXS and SQQQ that we rode through the Bubble. I will highlight some of the Blogs that I think provide a good summary of our thinking:
February 24th 2022; February 25th; 2022, February 28th, 2022;
March 8th, 2022; March 11th, 2022; March 14, 2022; March 16th, 2022;
And on March 21st, 2022, a review of some of the stocks and ETF’s that we are involved in our positions.
In addition, I went back to read a couple of Home page Studies that we posted in the past that setup the theme for what is happening now. i.e.
- 9/23/21 Things Changed
2. The Fed Backstory, October 30 2021