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Update: We have published Powell’s Choice - January 7, 2022 Newsletter !

Powell’s Choice

Markets were surprised to learn that the Fed is considering not merely ending QE but shrinking its balance sheet as soon as this year. This revelation in newly released Fed minutes hit stocks hard with the most speculatively priced NASDAQ stocks suffering the most acute damage. When the Fed prices money well below the rate of inflation, it gives license to investors to discount cash flows “to the moon.” Unfortunately, it takes a great deal of rocket fuel (i.e. earnings) to sustain moon missions and many companies are going to run dry before they even leave Earth’s orbit. We are likely to see a lot more space junk floating around before markets readjust to a new Fed reality.

If there is going to be a big surprise in 2022, it may be the Fed choosing to prioritize fighting inflation over propping up the stock market. Despite turning tail in early 2019 after the sharp 4Q18 equity market sell-off, the Fed faces more formidable political and economic obstacles today to supporting stocks. Three years ago inflation (as measured by the Fed, not necessarily as it existed in the real world) was quiescent. Now by every measure it is raging far above the Fed’s stated targets and consumers’ and politicians’ comfort zones. And inflation hurts the most vulnerable political constituencies that bore the brunt of previous bailouts of Wall Street. First came the bailout of large banks after the Great Financial Crisis of 2008-09, then the bailout of the private equity industry and stock market after the pandemic in March 2020. The political optics of the Fed lifting stocks again while inflation is spiking the price of food, energy and housing for most people are very unattractive. In the current political environment, focused as it is on “equity” of all kinds, the resistance to anything perceived as another bailout of the 1% may be more significant than people appreciate.

Latest Newsletters:

Devaluation Nation – January 1, 2022

Bird On A Wire – December 1, 2021

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The Many Saints of Wall Street – October 1, 2021

This Is Not America – September 1, 2021

How To Blow A Bubble – August 1, 2021

To The Moon – July 1, 2021

Upside Down House – June 1, 2021