War is Over

September 20th, 2021:

When the tapering starts, and the asset markets convulse in response, it’s not going to feel bad at all. It’s going to feel like a breath of fresh air. Prices will reflect the end of the maelstrom. Deceleration will allow us to catch our collective breath and check our heart rate as the thuds begin to subside. Paradoxically, the slowing of all the liquidity will feel like rain in the desert, for those of us who cannot fathom watching another six months of this breakneck pace. The gains will moderate, the gusher will succumb to gravity, the sound of slot machine jackpots in the Crypto Casino going off hourly will fade into the background. You will be able to think straight again. You will be able to take your time. You will be able to act rationally, rather than react covetously.

Come the stock and bond price correction, it will feel like a gift. Come the wind-down of the most extraordinary monetary policy in history, it will feel like a relief. And if that process is to begin with the Federal Reserve’s comments this week, so be it. It is long past time.

I wrote that as summer came to an end and the inflationary pressures that had been building all year were starting to tip sentiment over to the downside. The data got worse in October and November. Stimulus went from being reasonable to superfluous to ridiculous. It was, indeed, long past time to stop it.

And now the war is over.

Unemployment is back down to 4%. The economy has reopened. Workers have returned to work. Children have returned to school. The stock market has never been higher. The bond market is functioning. Housing prices have soared. We avoided another Great Depression thanks to drug development, monetary policy and fiscal stimulus.

We won.

And now it’s high time we’ve begun normalizing policy. First, the $120 billion in monthly bond market purchases needs to stop. It’s squirting kerosene on an already-burning fire for the benefit of absolutely no one. Speculators have been killed in the riskiest stocks during the second half of this year. First-time homebuyers are being priced out of potential purchases. Supply chains are being stretched to the limit and more consumer demand is not the answer.

Next: Overnight interest rates ought not be at zero percent. It’s completely unnecessary. The economy can handle an actual interest rate. Six months from now, this will be likely be the case.

In 2021, you had to have gotten three things right – and they were not that difficult to have figured out if you’re paying attention:

  1. The taper would be telegraphed far in advance and stock multiples would begin contracting in advance. This is exactly what happened all year. More than 100% of the S&P 500’s gain this year (25%) can be explained by earnings growth. PE ratios have actually shrank (shrunken?) since January.
  2. Inflation would rise, but stocks and REITs would far outpace it, thus preserving your purchasing power.
  3. The taper would come by year end and be greeted with relief. Nobody wanted to see $120 billion a month continually pouring into the asset markets in 2022. I think the relief rally for stocks after the statement yesterday, which is continuing into today, makes it evident that this has been the case all along. Small business owners, executives at large corporations, people shopping for houses and apartments – they’ve all seen enough.

And now we have to be rooting for a soft landing. A gentle but determined Fed. A normalization of policy and a healing of the logistical nightmare. A rebuilding of inventory and a cooling off of the casino as people find something else to do besides options trading, SPAC licking and meme stocking. Put your pants on and go to work.

It’s all underway. And not a moment too soon.