New, Hawkish Fed? I don't Buy It.
The duration of Fed policy decisions appears to be 30 days. It should be 30 years.
Summary: Last week the Fed doubled down on the Taper, saying they plan (hope?) to be out of the bond-buying business by the end of March. Today’s strong November Advanced Durable Goods report (new orders +2.5%, shipments +0.7%, unfilled orders +0.7%, inventories +0.6%, nondefense capital goods orders +4.0%) is certain to trigger additional hawkish statements from Fed officials. Although I support getting the Fed back to its real job—long-term price stability—I am skeptical of their new-found old-time religion. I still believe the Fed will chuck the Taper out the window the first time the economy hits a speed bump. And I still think the prudent thing to do is to restructure your portfolio for more inflation by shifting a significant portion from financial to real assets.
But first, I want to ask for your advice on design a series of short videos I am going to make to help investors protect capital in complex times. I have done a thousands of live TV spots over the years, and have worked with countless live audiences, but this is the first time I have tried to squeeze a complicated idea trough that little camera lens to people in their homes and offices. I would value your advice on how to make them most effective. In particular, on length (I think this one is about 2x too long), formal or casual (lose the coat and tie?), and use of charts and graphics. I would also welcome suggestions on topics to cover. In my next video I will talk about how to think about budget deficits, the national debt, interest rates, and asset prices. What other topics would you like to discuss?
Thanks in advance for your help. You can leave comments either on YouTube when you view the video, or by leaving a comment here on substack.com. And please invite any friends you would like to join our discussion. This newsletter is, and always will be, free for subscribers. My reward will be a robust conversation with interesting people where, hopefully, we can all learn something.
Fed doubles down on Taper
Last Wednesday, exactly 5 weeks after announcing the Fed’s new Taper program, Chairman Powell told us that the Federal Open Market Committee (FOMC) had changed its collective mind and decided to double-down on the planned monthly reductions of bond purchases, which implies the Fed will be out of the bond-buying business by the end of March.
While I think it’s important for the Fed to back to its real job of keeping prices stable, what Powell’s announcement really told us is that the Fed can change its mind and change policy, with little or no notice, any time it wants. And it confirmed something that we already knew; the Fed is not able to see any farther into the future than the most recent CPI or jobs report.
Today’s strong November Advanced Durable Goods report is certain to trigger more tough speeches by Fed officials. New orders +2.5%, shipments +0.7%, unfilled orders +0.7%, inventories +0.6%, non-defense capital goods orders +4.0%, defense capital goods orders +16%).
I don’t buy it. Although I support getting the Fed back to its real job—long-term price stability—I am skeptical of their new-found, old-time, religion. Buying bonds, like smoking, drinking, and every other behavior that feels good while you are doing it but gets you in trouble later, is a tough habit to kick.
I still believe the Fed will chuck the Taper out the window the first time the economy hits a speed bump. (Omicron may be that first speed bump.) And I still think the prudent thing to do is to restructure your portfolio for more inflation by shifting a significant portion from financial to real assets.
Long-Term Inflation is still what matters
As I wrote in my last post, it’s long-term inflation that really matters because, over time, inflation distorts every economic and financial decision and eats away at the value of our savings and our stock of capital. Long-term inflation doesn’t depend on last month’s CPI report or on how many ships are waiting to unload their containers in Long Beach. It depends on how much money the Fed is willing to print over the next decade or more. And that depends on exactly who will be making the decisions and how they think.
President Biden will still decide who will sit in 5 of the 7 chairs around the Federal Reserve Board table over the next few months. He has already filled 2 of them by reappointing Powell and Brainard as Chair and Vice-Chair of the Board of Governors. He will fill the remaining 3 chairs with people who think inflation is not such a bad price to pay for a little more short-term growth. And remember—Fed board members are appointed to 14 year terms. That’s close enough to long-run for me.
Based on everything I know about the current and prospective Fed Governors, I believe the Fed is going to throw the Taper program out the window the first time they see a big drop in stock prices, a drop in home values, or a series of disappointing jobs reports. They will just say they are data-dependent and that the data are telling them to give the Taper a time-out until the economy gets past whatever rough patch they imagine we are in.
We may not have to wait long for the Fed’s first big gut-check. The new Omicron COVID variant and the announcement that the Fed will double down on the Taper have spooked investors. If stock prices keep falling or the economy slows, we will see very soon wether the Fed’s actions are as tough as their press releases.
The bottom line for me is that I just don’t believe the Fed Board members will have the stomach to bring the Taper in for a landing, let alone sell the $9 trillion worth of bonds they are already sitting on. Unless they are willing to do that, and shrink their balance sheet and the stock of bank reserves, there is already enough money in the system to keep prices rising of the foreseeable future.
That means inflation is going to be around for a long time. Don’t take your eye off the inflation ball.
John. I did enjoy this seven minute clip. In my opinion you have one especially valuable asset beside your financial knowledge. You 'look' the part! Perhaps those thousands of previous presentations and interviews have led to engendering a confidence. I also agree with you that less time will result in better acceptance. Lastly I suggest you employ a 'hook'. A 'hook' is something that a viewer easily recalls. Since you are looking to produce multiple video's simple 'hook's can be a different appearance for each new video. Open collar, different shirt or jacket types, dramatic background change even if in the same room or location et cettera. Please continue your measured talking because too often speed can kill absorption. Your Friend, Mike
Dr. John - I liked the video. I thought it was the right length and provided an excellent high level summary of how inflation will drive a reweighting of real assets versus financial assets in investors portfolios. As far as attire goes, I actually think you don't have to wear a suit and in fact I think a dress shirt (sans tie) would be appropriate. The other thing that you may want to consider including in your video is how investors can make the move towards real assets. That is to say, how should they actually and practically increase their exposure to real assets. Should the enter into a real estate partnership, should they buy single family homes to rent, buy commodity futures etc. Great stuff though. Thank you for sharing.