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Posted December 16, 2021

Sean Ring

By Sean Ring

Fed to Hike Rates 3x in 2022; Market Loves It!

  • Powell tacitly admits inflation is neither transitory nor benign.
  • The Fed created this mess and is now looking for the exits.
  • Weve seen this before, and it doesnt end well. Despite that, the markets rallied yesterday.

Happy Thursday!

Its pouring down in Cebu as we await the arrival of Typhoon Odette, or Rai, if youre in North Asia. (Different Asian countries give the same storm different names.)

I hope I can get a new Rude out tomorrow.

But if Im treading water, well have something in your mailbox all the same.

At the risk of beating a dead horse, lets talk about the Feds call yesterday and the markets reaction.

Nothing to See Here, Folks!

In the coming years, Jay Powell and his ilk are libel to be viewed as the financial equivalent of Baghdad Bob (or Comical Ali, if youre British).

Remember him?

He was the Iraqi Minister of Information.

The Fed is seeing something clearly, and the market is relieved that its finally getting on the ball and doing something about inflation.

Id have preferred the Fed didnt create the inflation, to begin with, but thats not the world we live in.

But there is something that smacks of sheer ignorance in the markets.

Its as if the market is saying, Everything's okay now. Daddy is home now, and hell take care of us.

The stock market is up, thanks to Powell pledging to raise rates.

Maybe.

The Wall Street Journal seems to think it's because the market now has faith in the Fed that the Fed hasn't lost its way and will get ahead of the curve again.

I disagree wholeheartedly.

These are the types of policies that are hastily put together and thrown out into the market to test them.

This time, the market acquiesced.

Why three times next year, instead of four?

Why isn't the Fed raising rates already?

Why didnt the Fed taper their purchases of bonds earlier?

It's because they don't really want to do it.

The real reason that they are signaling this stuff, the real reason why they're doing this is they're testing the waters. They wanted to see how the market would react.

If you recall, in late 2018, after a bit after Powell started raising rates, the market tanked by 30%.

It wasn't until Donald Trump had said on Christmas Eve, I think it's a good time to buy stocks, that the stock market started to recover.

That's because they stopped hiking at 2.5% and later completely reversed policy and started softening again.

I think this is the wrong message to send to the market. The Fed needs to raise again and raise slowly.

Powell and Co. don't need to sit there and say, "For this entire year, this is what we're going to do."

I dont buy the certainty argument, in that the market needs a schedule of the hikes. Stock prices ought not to depend some much on a 0.25% rate hike.

Calmer England

I used to teach in England.

When I was learning about the mechanisms of the Bank of England, it was really interesting because the Bank never raised rates in consecutive meetings. They would move and then - GASP! - see how the move went.

According to the Bank of England, a rate hike takes a full 18 to 24 months to work its way through the economy.

The problem with the Fed is that they will continuously hike, or continuously cut, before any of these cuts or hikes have had any effect on the economy whatsoever.

The haste of the moves blows up bubbles during cutting cycles and then pops the bubble they just created during the hiking cycle.

This policy has been wasteful since day one and has become more and more apparent that it's a disaster for the economy now.

The Fed needs to reassess how it manipulates interest rates altogether.

Of course, I just rather end the Fed, but that's not going to happen.

The Fed should never announce more than one rate hike ahead at the time. The market can do without that because they're wrong often and change their minds a lot of the time.

The UK, which has 60 million people and an economy 1/8th the size of the United States, thinks that rate hikes or cuts don't filter through the economy for a minimum of a year and a half.

Why does the United States government and the Fed think that rate hikes filter through the economy every eight weeks? It's ludicrous.

They need to do things more softly. And yes, it looks like they're doing nothing, but that is sometimes the best thing to do: Nothing.

I think next year, The Fed will inadvertently pop this bubble. They're going to raise rates too quickly and they're going to wind up pricking the bubble that they themselves created.

Yes, three hikes in one year may be too much.

Thats how fragile and financialized the American economy has become.

Now, I'm not sure that's all that bad.

The main problem in the market is that borrowed money is driving a lot of this, so people who have actual cash can't get into the market because it's too expensive.

I'd love to see the froth taken off the top of this market. But unfortunately the froth on this market may be half the market.

So were probably going to see a big selloff.

Now, do I actually think the market will go down 50 to 80% next year?

I dont know. But there is a decent probability that it will happen.

Indeed, if they ratchet things up too quickly, they may not be able to pull back if the bubble pops.

Rate hikes are like the pressure from squeezing toothpaste coming out of the tube.

Once the toothpaste is out of a tube, you can't put it back in.

Besides monetary policy, weve got supply chain issues and fiscal recklessness.

All this bodes ill for 2022s market performance.

Were due for a correction if nothing else.

Jay Powell will see to it. The market may just clap again.

Until tomorrow.

All the best,

Sean

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