Getting Through 2022, On The Way To 2052

Summary

• Developed economy democracies are constructing a thirty-year threat/growth narrative to follow the COVID-19 narrative.
• The thirty-year threat/growth narrative requires monetary and fiscal policy expansion on a scale larger than the COVID-19 response.
• The American thirty-year narrative involves the funding and creation of a bipartisan consensus from the perceived Chinese threat via Latin America.
• In view of the thirty-year narrative timeline compression, the Fed has limited time and space available to taper.
• The Fed’s pivot from its inflation mandate to its employment mandate will require a new definition of what full employment means in relation to the COVID-19 experience.

Blue Planet Studio/iStock via Getty Images

Don’t look back in anger, look forward in anger instead ….

(Source: visualcapitalist, caption by the Author)

There is still some unfinished business, from 2021, that needs to be addressed at the global level in 2022. Sadly, the resolution involves conflicts. Fortunately, for some investors, the conflicts will require the scale of monetary and fiscal policy stimulus, that moves the global economic needle, in increments that will generate significant amounts of Alpha for those with the appropriate exposure.

Rather than following the herd, that is discounting the COVID emergency monetary and fiscal policy stimulus unwinding, it may be more rewarding to look for value in what this move is uncovering for believers in the ensuing economic stimulus. The current inflation spike is already uncovering these opportunities, hence, emergency stimulus unwinding, should it actually occur, will provide additional discounted value.

Even before the old business is resolved, new threats and opportunities have been identified.

(Source: Bloomberg, caption by the Author)

Some economists estimate that, by 2050, only 26% of global GDP will come from democracies. Conveniently absent, from this alarming headline, is a statistic that explains how the accumulated wealth, between now and 2050, will be distributed. “The 1%” appears to have found a way to hide, within “The 26%”; and militate the latter into confronting “The 74%” on their behalf.

If the current threat to global supply chains, from COVID Alpha to Omega, is not enough, to elicit change, this new alarming 2050 statistic should provide a significant nudge. Big Change, and its new meme “Build Back Better”, costs Big Bucks. When Big Bucks are spent, central banks are obliged to lend them in perpetuity at low rates of interest.

So, just when it is assumed that the global COVID19 fiscal and monetary policy stimulus can be scaled back, a new reason for stimulus for the next thirty, or so, years is under construction and dissemination. This new reason is bigger and longer in duration than the base COVID19 thesis. Consequently, the combined fiscal and monetary policy response must be larger and longer in duration, than the COVID response, by default. If the reader thinks that central bank balance sheets and price inflation are dangerous now, the next thirty years will test his/her mental and intestinal fortitude to the limit.

The US is back to square one ….

(Source: Gallup)

According to Gallup, US economic sentiment is back to square one in relation to peak COVID-19. Some form of economic policy stimulus is, hence, required since the employment recovery back to pre-pandemic levels has, thus far, failed to elicit the commensurate response in terms of economic confidence.

(Source: Gallup)

According to the Gallup survey, the economy is becoming more important to Americans in their everyday lives. Those who believe the news headlines are assuming that inflation is prime amongst American economic concerns. This is not the case, however, according to Gallup.

(Source: Bloomberg)

It is true that inflation is a factor influencing consumer sentiment, but this inflation is a symptom of a larger cause. Inflation is taking a big chunk out of consumption. This loss of purchasing power, surprisingly, does not militate the American consumer. The American consumer, stoically disciplined at the shops and online, is now looking for someone to blame for his/her loss of real purchasing power.

For roughly a third of Americans, this hunt has become a violent one.

(Source: Gallup)

The rising concern over the economy has some interesting context, especially for the Fed. The economy in general, that is growth and the distribution of its proceeds, is the main concern. Inflation is well down the list of concerns. The Fed should, hence, be informed to tread swiftly and lightly with its scheduled taper. Economic growth is already the main concern and will rise as the taper ensues. Killing the economy Volcker Style, may win the hearts and minds of economists but may, also, alienate and militate the majority of Americans who do not engage in “the dismal science”.

(Source: Gallup)

Political leadership is, by far, the main concern of Americans. Applying Occam’s Razor, to the Gallup data, one can deduce that perceived poor political leadership is the main reason that economic sentiment is so bad. Sadly, the razor may also be revealing that Americans, polled by Gallup, are simply expressing their own individual partisan view of those whom they blame. If both deductions are correct, one may conclude that America is currently structurally partisan, bottom-up, and top-down.

(Source: Bloomberg)

At the grassroots level, a significant minority of Americans have the intentions and capabilities to vote with something stronger than their feet. A recent poll, by the University of Maryland, has found that roughly one in three Americans believe that political violence is their Constitutional birthright. This level of violent political disapproval is the highest in decades.

Whatever the root cause, of increasingly violent political expression, it is imperative for the US economy that the current political dialectic either yields a decisive elected victor or a draw that is acceptable to the majority of American voters. It would, however, be a brave gambler who wagers on either outcome at this point in time.

(Source: the Author)

Fortunately, Federal Reserve Chairman Jerome Powell is aware of the economic growth threat. As noted, in the last report, he has already introduced some “ambiguity”, into his guidance, in order to swiftly pivot back, from his inflation mandate guideline to his employment mandate guideline.

Ambiguously Qualitatively Normalizing/Tightening whilst Quantitatively Easing ….

The last report explained how the Fed was encouraging Mr. Market to create financial conditions of higher short-term volatility and lower long-term volatility. It was suggested that this was being done to blow an economic headwind, that would suppress inflation whilst preserving sufficient liquidity to prevent a recession. In practice, the New York Fed is responsible for the execution of this ambiguous strategy.

(Source: the Author)

As noted previously, the Fed is Qualitatively Normalizing/Tightening whilst, simultaneously, continuing to Quantitatively Ease. The Qualitative Normalizing/Tightening blows the economic headwind, and the increasing short-term volatility, whilst the expanding Quantitative Easing purchases expand the liquidity cushion, lowering the long-term volatility, in order to head off a recession.

(Source: New York Fed)

Following the last FOMC announcement, the New York Fed confirmed that it is Qualitatively Normalizing/Tightening whilst Quantitatively Easing. Mortgage-Backed and Agency security holdings will be cut back, whilst US Treasury purchases will increase.

As the domestic political situation festers, the chances of yielding either the desired political majority or acceptable draw, outcomes look more likely to be driven by an external factor. Clearly, COVID-19 is not that external factor, since it has been internalized into the partisan dialectic. Climate Change is similarly encumbered.

(Source: the Author)

There is, however, one big exogenous thing that can yield either desired political outcome. That big exogenous thing is China.

Yuankee go home ….

The Chinese economy has rapidly narrowed the GDP gap with the US in 2021.

(Source: Bloomberg)

The Yuan is also establishing its own reserve currency status in the Emerging Markets space, which threatens to challenge the global reserve status of the US Dollar. The Peoples’ Bank of China (PBOC), and its monetary policy settings, are more in sync with the Emerging Markets economic cycle than the Fed and its own settings.

(Source and caption by the Author)

Whereas the Fed is tapering and causing pain in Emerging Markets, the PBOC is back into its easing cycle already. The PBOC has begun targeted monetary policy easing steps already, and a trade spokesman sees “unprecedented” hurdles to Chinese trade in 2022, thereby, providing the context. Income tax breaks have already been scheduled to stimulate Chinese consumption. China is, thus, embarking on the next fiscal and monetary policy stimulus, not only, before the Fed, but, also before COVID19 has been eradicated. In fact, the Chinese stimulus conflates directly with the latest COVID19 variant outbreak.

Whilst the execution of the next American fiscal stimulus is politically gridlocked and countered by tighter monetary policy from the Fed, China’s economic stimulus is seamlessly coordinated and unobstructed. The global impact of China’s coordinated economic stimulus will, thus, easily be transmitted to those partners who China wishes to stimulate and synchronize with its own economy. The sense of the global economy slipping, through US fingers, is a tangible one.

The Fed, in comparison to the PBOC, appears to be driving the Emerging Markets into the hands of the latter. China’s economy and monetary policy will be in expansion mode, thereby, exerting an even stronger influence on Emerging Market economies than a US economy in which monetary policy and economic activity are contracting.

“It is pardonable to be defeated, but never to be surprised” (SIC) ….

(Source: the Author, caption by John “Hannibal” Smith)

The China problem has been managed and reported, with great skill, by the US executive to run in parallel with the domestic political situation.

(Source: the Author)

In a previous report, this author noted that the conflict with China is now coming to a head in America’s backyard in Latin America.

(Source: Guardian, cadence by the Author)

Nicaragua rang in the New Year by announcing “ideological affinity” with China and promptly seizing the Taiwanese embassy. China joined the celebration, of this “ideological affinity”, by opening its own embassy. The actions, and the slogans, are declarations of intentions and capabilities in political terms. China now has another bridgehead from which to, operate, and expand in the region.

(Source: the Author)

VP Harris’s recent initiative, to engage with the regional threat, appeared to this author, as a tracer shot for something larger, bipartisan, and Federal. A larger Federal fiscal initiative, coincident with an escalation of the regional threat, would meet the domestic imperative to arrive at a bipartisan political outcome, that is conducive to said large fiscal initiative commensurate with said threat.

(Source and caption by the Author)

The timeline, for a concerted bipartisan Federal Government response, is now at the intersection of the regional and domestic agendas. The only thing, still, appearing to stand in the way is Senator Manchin. The Senator appears to be an easy sell on the regional threat from Latin America and China. He is a tougher sell on the domestic fiscal agenda. His patriotism, on the regional threat, may enable him to allow his discretion to show the better part of his valor on domestic matters.

(Source and caption by the Author)

VP Harris’s tracer shot was on the mark for the larger bipartisan Federal punt that has swiftly followed.

(Source: POTUS, caption by the Author)

The ensuing, and labored passing, of the National Defence Authorisation Act for 2022, ostensibly, shows the creation of a bipartisan political consensus (and fiscal stimulus) out of the Chinese threat.

(Source: Bloomberg, caption by the Author)

Hypothetically (and hypersonically) speaking, the defense budget is already earmarked in response to the October Surprise of China’s clandestine August Surprise in outer space.

(Source: the Author)

The Bay of Pigs moment, anticipated by this author, when the Chinese regional threat, via Latin America, is confronted robustly has moved closer as the New Year has unfolded.

(Source: Bloomberg)

The economy of El Salvador, the earliest adopter of the Bitcoin Standard replacement for the US Dollar Standard, is also now in play in the capital markets. El Salvadorian bondholders are, allegedly, unhappy at the way President Bukele is running the economy. Specifically, they are unhappy with his adoption of Bitcoin.

In the absence of strong American economic growth, the US Federal fiscal deficit under construction, in response to the emerging threat, is unsustainable. Consequently, the deficit needs to be mitigated through the process of monetary inflation and interest rate suppression. The Fed, therefore, has very little time available to taper.

Can’t pay, won’t pay ….

In this author’s view, the Fed will be called upon to ensure that the fiscal burden, of the larger American bipartisan fiscal initiative, can be carried by the Federal Government at an, apparently, sustainable cost of interest.

(Source: the Author)

This author, therefore, expects the Fed to manage this Federal debt burden, on its balance sheet, with the creation of more monetary inflation than was used for the COVID19 response. The current drop in economic sentiment, as noted by Gallup, and its recessionary portents will be music to the Fed’s ears; since it is a disinflationary and recessionary tune that puts a ceiling on interest rates whilst calling for further Fed easing.

(Source: Federal Reserve Board)

The attendant financial stability risk, from the rising Federal deficit and monetary inflation, is already being mitigated with enhanced, and advanced, oversight of the large financial institutions where most of the market risk will be situated going forward.

The reader should also note that the Fed’s current Qualitatively Normalizing/Tightening whilst Quantitatively Easing stance is advanced preparation for the future fiscal environment. Assuming that the Christmas bipartisan fiscal spirit is sustained, for longer than it takes the President’s ink to dry on the defense bill, the US Treasury will be issuing more debt into the benign interest rate environment that the Fed is currently preparing. Mitigated financial stability risk is also currently being prepared by the impact of the Fed Qualitatively Tightening on risk asset prices.

Unless one is a beneficiary of the NDAA, and/or Build Back Better (BBB) schticks the potential for gainful employment in America in 2022 is limited. As and when the Fed drops its inflation mandate schtick and picks up the employment mandate one, those who have not been beneficiaries of the guns and butter will be in a parlous financial state. The persistence of COVID-19 will have made this situation even worse. The Fed’s balance sheet will, then, be called upon to sustain the livelihoods of both the NDAA/BBB beneficiaries and those left behind by it. The Fed has a prosaic term for this micro-mandate, within its formal employment mandate, known as Broad Inclusivity.

And so, on to next year’s post-inflation fish and chip wrapper.

Not your grandfather’s, broadly inclusive, labor market ….

(Source: New York Fed)

Whilst things seem to be playing out nicely for the Fed, this may not be the case in relation to the employment mandate that it intends to pivot back towards. The New York Fed’s latest Survey of Consumer Expectations Labour Market Survey (SCELMS) is throwing off some worrying signals. The report shows that Americans are confident about looking for and finding jobs. They are less confident about getting the higher desired salaries that are on offer. There are also a significant number of Americans stepping out of the labor market, potentially forever. Earlier than normally scheduled retirement seems to be the growing trend. This trend is percolating through the generations, to those who would not normally be considered to be of retirement age.

The SCELMS report could be a microcosm of the game of cat and mouse being played by employers, whose margins are under pressure, and their workers. It could also be a symptom of the alleged Great Resignation.

Understanding what is driving the labor market is critical for the Fed if it is not going to end up with egg on its face, again, after calling the inflation situation all wrong for so long. The employment situation is nuanced, to say the least.

The Fed’s monetary policy largesse, and its impact on asset prices, may have provided the nest eggs for the early retirees. The Great Retirement component, of the Great Resignation, is clearly a demographic issue, related to the age structure of the population, but there may be some monetary policy undertones that have influenced the context and timing. Easing further may trigger a massive exodus from the labor force, as the leavers cash out or decide to take up the leisurely pursuit of trading, rather than working for a living.

Raising interest rates is a solution, but not a panacea. Whilst tightening monetary policy may appear to starve the Great Retirees and Great Resignators back to work, at first blush, it could also trigger a wave of retirement to live on higher interest rate annuities and savings accounts.

It is becoming clear that a new definition of full employment is beckoning. Evidently, Chairman Powell would like to define it. And, who could blame him since the Fed will have to deal with it along with other fiscal excursions by the executive branch of the Federal government?

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.