1000th Rate Cut & $23t printed since GFC But party ends next year

Despite all the warnings and jawboning by the Fed on its tapering, when the Fed chair again ‘confirmed’ (not started) on Friday they would begin tapering ‘soon’ (not started) and end it by June 2022 the market had a little hissy fit that saw shares down and bullion up.

How to read that is not straight forward but this could well be the market thinking this is too little too late or simply that tightening is going to end in disaster.  Despite Powell stating "it's time to taper... not time to raise rates..." the market is increasingly pricing rate hikes next year with expectations at around 70% for the first by June and nearly 1.5 hikes by September and over 2 by December!

In isolation and in reaction to surging inflation that would seem sensible policy.  What the market is not factoring in however, or maybe the reaction to sell shares and buy gold on Friday means they are, is what higher rates will mean to servicing the world record debt burden and a market addicted to cheap money (inflating that debt burden by the day).  In 2018 we saw the sharemarket crash on tapering alone.  What pray tell do they expect on tapering and interest rate hikes!? And to reiterate, they are merely tapering $120b / month to June 2022.  Crescat’s Otavio Costa rightly calls the insanity in the tweet below:

Chart, histogramDescription automatically generated

Yet again herein lies the Fed’s trap.  Tighten now amid surging inflation and crash the entire market.  Keep it ‘loose’ and surging inflation turns into hyperinflation and the system breaks.

Bank of America spoke to this last week expecting a ‘credit event’ next year as this mess plays out.  They tell us that Turkey’s surprise 200bps rate cut last week was the 1000th central bank rate cut globally since the GFC.  1000! They calculate that central banks have also printed no less than $23 trillion of new money since the GFC.  And you will note a significant omission from the chart below getting to that figure… it does not include China who arguably went harder than anyone.


And the outcome of all that ‘new money’:

  • bitcoin @ record high,
  • stocks @ record high,
  • labor market quits rate @ record high,
  • wage growth plans @ record high
  • bond allocations @ record lows for institutions (net -80% in BofA FMS)

However… and this is the big BUT.  The liquidity party ends next year according to them and shares are not pricing this in. Indeed, as we sit here now they say real earnings yield in the US is negative 2.4%, the lowest in 80 years and for context the average is 4.6% in the past 145 years.  They point out that the current combo of high inflation and high equity valuations are usually only seen in times of war, depression, or stagflation.  Each of these are normally followed by sharp repricing “events”.

Whether the road ahead is one of runaway inflation or a big market shock, gold and silver historically perform well in either.