A Review Of The Market…. There Is An Acronym For That
You cannot read a financial related article (or social media post) these days without seeing the latest acronym — YCC, SLR, FOMO, NFT and a favorite of the reddit crowd YOLO (you only live once!). While these are meant less to confuse and more to abbreviate and allow for a reader’s maximum consumption of the endless information available at our fingertips, we focus on some of the key items relevant to the market today.
Fed Chair Powell made some recent statements that the Fed will remain accommodative as the economic recovery is far from complete and the unemployment rate is still elevated. It has become increasingly clear that the Fed’s number one focus is unemployment. Alex Lennard of Ruffer LLP was recently quoted referring to the early 1980s, “Volcker said he was going to tame inflation, unemployment be damned. Now it’s the other way around.” With no hikes in short-term interest rates until (at the earliest) late 2022, the path for higher consumer prices remains wide open.
As the 10-year US Treasury bond yield has doubled over the past 6 months, there has been speculation as to whether Powell would support “yield curve control (YCC)”, which would keep downward pressure on long-term interest rates. Rather than control the yield curve, which is something the Biden administration would prefer (to help finance additional fiscal spending), Powell has opted to embrace the volatility and allow the bond market to take over. Powell also allowed the change to the supplementary leverage ratio (SLR) for banks to expire, as it was a measure instituted to stabilize the US Treasury market during the pandemic. Of course, Powell could always capitulate if rates move up too far and too quickly. Nevertheless, the Fed could lose the battle with the bond market, which would likely spillover to equity markets with increased volatility.
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As students of financial history, we always look for comparisons to other periods of time in the financial markets. A recent comparison by Jason Trennert at Strategas to the post-World War II era seems prescient. “The deficit as a percentage of the economy went from -3.0% in 1940 to -13.9% in 1942 and -29.3% in 1943.” Similar to today, there was a lot of coordination among fiscal and monetary authorities with low stabilized yields to reduce borrowing costs. What resulted after 1945, were sharp spikes in inflation as measured by various baskets of commodities and consumer prices.
Naturally, inflation may be the only way to escape our exploding deficits, although it debases the wealth of the average person. As macro strategist Luke Gromen recently wrote, “How will the ensuing inflation be sold to the general public? Who could be against “sharply cutting poverty” and “handing out large amounts of cash to families?” For this reason, it is prudent to own hard assets like commodities, materials and precious metals (ie. gold) to hedge for this inevitable inflation because austerity is an unpalatable pill for which no one (both the political and the populace) has the stomach. Other speculative assets like Bitcoin, while it is used around the globe for money laundering and corrupt activity, has grown in part due to the expectation of debased fiat currencies.
Investor speculation has continued in various asset classes including equities, as many investors (some with newfound stimulus checks) have chosen to take a flyer in the stock market. Even the “Fear of Missing Out” has an ETF trading these days (FOMO). In addition to Bitcoin, the latest digital craze are non-fungible tokens (NFTs) in the digital art, music, sports memorabilia and even the purchase of digital land in video games! Even Time magazine has taken out ads to sell digital art of previous covers – brilliantly, they are monetizing the exact thing they are panning! As inflation picks up, few speculators may survive, but many will get badly burned. As students of financial history, we often say “Learn from History.” (LFH!)
The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, SIPC & HighTower Advisors, LLC, a SEC registered investment advisor. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates. This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.