The process of slowly pulling back the stimulus the Federal Reserve provided during the pandemic is set to begin. These are uncharted waters for the Fed as it has never had to pull back from such a dramatically accommodative position. For most of the past year and a half, it has been buying at least $120 billion of bonds each month, providing unprecedented support to financial markets and the economy that it now will initiate the unwinding process.
The Federal Reserve’s bond-buying Bonanza has added more than $4 trillion to the Fed’s balance sheet, which now stands at $8.5 trillion, about $7 trillion of which is the assets bought up through the Fed’s quantitative easing regimen. The purchases have helped keep interest rates low, provided support to markets that malfunctioned badly at the start of the pandemic crisis, and coincided with a white-hot stock market running on no fundamental footing.
We have very high valuations across the board at asset prices. What does this shift away from very easy money do to asset prices? The answer so far has been … nothing. How things go from here likely depends on how the Fed stage-manages its exit from its money-printing operations. The plan is to begin tapering in December, reducing the purchases by $15 billion a month and winding down to zero in eight months, or July. What happens after the taper is what’s really important.
For investors, it will be a new world in which the Fed is still providing support but not as much as before. While the mechanics sound simple, things could get complicated if inflation continues to run above the Fed’s expectations. For clarity’s sake, the Fed’s target rate has always been 2% and it would appear that the deluge of fiat money pumped into our economy makes hitting that bogie unattainable.
FOMC members increased their 2021 core inflation estimate by about 23% to 3.7%, increasing it from the 3% projection in June. But there’s plenty of reason to believe that there’s considerable upside to that forecast.
For instance, in recent days economic bellwether companies including General Mills and Federal Express have indicated that prices are likely to rise. Natural gas is up more than 80% this year and will mean substantially higher energy costs heading into the winter months. Bundle up.
It’s rare for the Federal Reserve to open its playbook like this. They are telling you what they are going to do and when. If history is any guide, taking the “Don’t just do something…stand there…” approach will likely have a negative impact on equity investors. If you don’t want to get his by this freight train, don’t stand on the tracks.
The only way to memorialize a gain or a loss in a stock is to sell it. No one ever went broke taking profits. There will be reinvestment risk in the debt and equity markets because the fundamentals will have to do when they shut down the printing press. Chasing yield and price appreciation is going to become more difficult.
It is a very good time to take stock of your stocks. Moving some of those gains earned over the past decade or so’s a historic bull market run into more conservative risk profile assets makes some sense.
Senior Life Settlements are perhaps the only asset class that is completely agnostic and disaffected by the Fed’s choreography. Life settlements are an absolute return vehicle that provides historically double-digit, non-correlated returns to the markets…a solid way to fight inflation. They don’t care what the Fed does, what China does, or what people do. They just do what they do…make money.