I’m going out on a limb here but I think this is a plausible scenario that could well play out this year…she says.
We all agree that inflation has run much hotter than the central banks around the world would like and now they have changed their mandate from: “we want low unemployment levels” to “we are going to tackle inflation”.
In February 2022, inflation was 7.5% according to the US CPI (consumer price index) but since they move the goalposts as to how it’s measured, it is suspected that it is a lot higher than this. The Federal Reserve went from saying that ‘inflation is transitory’ (the Word of 2021) to ‘we are now going to retire the word transitory’, as they conceded that they hadn’t anticipated high prices to persist for so long as they did.
Now the central banks around the world are behind the curve on this one and trying to play catch up by putting out the fire they created, which was initially caused by printing fiat currency into oblivion to keep the economy propped up. Throughout COVID-19 they launched a ‘quantitative easing’ (QE) initiative to pump dollars/pound sterling/japanese yen etc into their financial systems to encourage spending, however, as of March this will stop.
Banks and Governments have tried to prepare the markets around the plans to halt their QE program so as to avoid a violent correction and downturn in the market. They have done so by broadcasting several times that they are “thinking about” thinking about curbing QE, then they moved to thinking about curbing QE and now they are actually stopping QE. They have given financial markets plenty of warning in the hope that there won’t be a repeat of what happened in 2013 and 2018.
In both those scenarios the Fed had stopped printing money and curbed QE too abruptly so financial markets got spooked and went down by 20%, causing widespread panic. This pressured the central banks into re-launching QE rather swiftly. This was known as the ‘Powell Pivot’ as Jerome Powell – Fed chair – at the end of 2018 went from stating that the American central bank was serious about tightening financial conditions to quickly rotating 180 degrees and then saying they would reinject more liquidity (dollars) into the market again!
It could well be that we find ourselves in a similar position this year. The inflation numbers are the highest they have been in many decades, people who don’t own assets are getting crushed and the financial markets are reaching all time highs. The Biden administration is losing votes and encouraging the Fed to reduce inflation in time for midterm elections. The central bank has now accelerated it’s plan in reducing QE, intends to raise interest rates and has even alluded to the fact that they may even introduce QT – quantitative tightening (taking money out of the economy)!
Now to understand the impact of what these 3 moves could have on the economy, I would suggest reading my previous blog post – 2022 forecast – to fully grasp why this global economy can no longer handle higher interest rates, given the burden of debt every country is laden with.
If we have another financial correction of 20% the Fed may not come to the rescue at first because the inflation figures will still be high, hurting the little people; however, when/IF the market continues to drop further – damaging the pension pots of many baby boomers hoping to retire soon – then the central bank will have no choice but to boot up that printing press yet again.
Given what happened to assets and the financial markets in April 2020 when the fiat currency printer went Brrrrrrrrrr…..risk assets/tech stocks/housing prices will push higher once more. How long that can be sustained for until inflation once again raises its ugly head is anyone’s guess but feasible, nevertheless.
How a retail investor or even a hedge fund manager is to navigate through the predicament we face this year is a tricky one, which is probably why a lot of people are holding a higher proportion of their portfolios in cash right now, as it seems a treacherous time to be allocating money into either risk-on or risk-off investments.
So there we have it. My prediction. Let’s see how wrong I am as the year progresses…
(I wrote the above piece in late February and only posting it now, but since then Russia has invaded Ukraine and there is nothing more inflationary than war!!!)
Sit tight and have a little bit of cash reserved just in case opportunities present themselves…….or if we have a bank run!
As little exercise as 20 minutes a day walking has been proven to significantly improve one’s mental health from the endorphins you get by just being outside and moving, so go on – put those trainers on!
This blog is for educational purposes only and should not be construed as financial advice. It is purely opinion-based.