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Update: We have published Bird On A Wire - December 1, 2021 Newsletter !

Bird On A Wire

Central banks are largely but not solely responsible for this madness. They had ample assistance from fiscal policymakers who poured trillions of additional dollars on the bonfire. Fiscal stimulus will tail off though the final stimulus bill being negotiated by Congress will almost certainly pass (if not before Christmas then after) and bring total fiscal spending since the pandemic to more than $10 trillion. But even with that support in place (the spending will occur over many years), it is doubtful that monetary authorities will be able to wean markets off QE/ZIRP without causing a significant drop in stock prices (15-20% seems like a reasonable expectation).

Fed Chairman Jay Powell finally acknowledged that inflation is not “transitory” and the Fed should taper more aggressively than $15 billion per month. High “official” inflation statistics render it impossible for the Fed to maintain credibility in the face of years of mounting real-world consumer prices and exploding financial asset prices. We will learn after the Fed’s December meeting whether the Fed will actually engage in more aggressive tapering or allow Omicron to scare it off. Barring information that Omicron poses a new threat to economic activity, tapering should proceed at $30 billion a month with the Fed reaching Ground Zero in March. If markets don’t like it, too bad. We are in a stock market as well as a financial asset bubble that needs to end. The price/earnings multiple on the S&P 500 doubled from ~14x to ~28x since the Fed made QE and ZIRP normal operating procedure, creating a situation in which many companies are incapable of generating sufficient earnings to justify their stock prices. The primary factor sustaining their current valuations is an endless tsunami of cheap money.

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