The Fed has been preparing the markets and signaling the markets about what their next course of action could be. The main purpose of that is to take the punch out of their real implementation of whatever they plan to do and take the surprise element out of the markets.
In a recent online Fed ‘town hall’ event with teachers, college and high school students, Powell alluded to the idea that the urgency and emergency of the pandemic is largely behind us. He also stated that as the emergency has abated, the central bank needs to put its ‘crisis tools’ away.
The Fed mainly has two key crisis tools left in their arsenal. One is the changes in any short term interest rates and the other is the monthly purchase of $120 bio worth of bond purchases. With the economic activities and GDP running ahead of pre-pandemic levels, it is time that they considered removing the so called ‘punch bowl’.
Every time Powell talks about it, the market pulls back a bit but nothing to frighten the investors. So far, all these levels have served as a buying opportunity and think there won’t be any surprises any time soon. On top of that, we are waiting for the release of another $3.5 trio dollars that should be unleashed on the economy.
In the short term, when the Fed actually tightens and makes dollars more expensive to borrow or stops buying $120 bio of bonds, there’s bound to be a reaction and it can be a wild one. Think that’s still sometime away.
Nobody has got rich by printing more money. Take examples of Venezuela, Zimbabwe and Argentina. Their printing of money has not affected us as they don’t have much of a role in the global economy. It has only effected their local economy.
When it comes to the US Dollar that’s not the case. The Dollar is still the world’s major reserve currency. More than 80 % of global trade is dollarized. The dollar money printing creates lot of distortions.
With the dollar money printing, the rich becomes more richer. Labor can never keep up with it. Capital markets, banks, big corporations and individuals who have access to easy money will benefit the most creating a lot of source for social friction.
The worst abusers of debt are being treated like royalty. Think about it junk bonds yield an average of 4%. That’s the lowest they have ever yielded. It’s even less than inflation today.
The next up move in equities should be the last hurrah. It should also provide the great opportunity to be out of equities for a good amount of time.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.