I first heard the term “Don’t fight the Fed” early in my career at a boutique hedge fund.
At the time, I was working as a research analyst for one of the fund’s portfolio managers. And in that first year, I learned a lot about how tech stocks react to the Fed’s interest rate adjustments.
If you’ve been in this investment game for a while, you probably remember the Fed raising interest rates in the spring of 2000. You probably also remember the dramatic selloff in tech stocks that quickly followed.
Investors who “fought the Fed” and tried to buy tech stocks while the Fed was raising rates got crushed. While investors who understood the dynamics were able to position their investments in more stable areas of the market.
That’s the best way to protect your wealth when the Fed is tightening.
Today’s market action brought back memories of those hedge fund days. Stocks sold off sharply after minutes from the last Fed meeting were released.
The minutes indicated that many Fed members are becoming increasingly worried about inflation.
Reading between the lines, it’s becoming clear that the Fed is willing to act quickly. That means it may wrap up its bond buying program more quickly. The Fed may raise interest rates at a faster pace. And some members are even talking about reducing the Fed’s balance sheet (possibly selling treasury bonds).
Considering this shift in policy, please remember: “Don’t fight the Fed.”
There are plenty of stocks that will do well in today’s market. But owning speculative tech stocks with low earnings (or no earnings) is not a good way to make money in these early days of 2022.
Here are some of the most important links from my research today:
Don’t Fight the Fed
- Barrons: Fed minutes point to earlier, faster rate hikes.
- Powell emphasized the ongoing pandemic’s risks to inflation.
- Several at the Fed consider labor market to be at “maximum employment.”
- The Fed began discussing how to start shrinking balance sheet.
- WSJ: Interest rates worries batter stock market.
- Bond yields rose to their highest levels since early April.
- Fed minutes indicated Fed may lift rates as soon as March.
- The 10-year treasury yield rose to 1.7%, it’s highest level since April.
Energy Demand Remains Strong
- Argus: U.S. oil producers ditch hedges for oil rally bonanza.
- Open interest for swaps and crude oil futures has dropped.
- 2022 hedges as a percentage of total volume are half of 2021 levels.
- The drop in hedges will have the biggest effect on independent producers.
- Bloomberg: The largest wind power project ready to come online.
- Owners of transmission lines reached agreement with Colorado ranch.
- This clears the way for Wyoming wind power to reach the West Coast.
Digital Assets in 2022
- CoinDesk: Bitcoin trading volume remains low.
- Bitcoin price dropped by nearly 3% over 24 hours to start the week.
- Spot trading remains low. Less liquidity could mean higher volatility.
- Glassnode: Fewer Bitcoin transactions could signal lower demand.
- Over the last year, 7.5 million new “non-zero balance” wallets added.
- The number of active onchain entities broke above 275k per day.
- This is still well below last year’s peak above 425k per day.
- CoinShares: Digital asset investment products saw 36% inflow increase.
- Total assets under management ended the year at $62.5 billion.
- 37 investment products were launched in 2021. (Vs. 24 in 2020)
- The final week of 2021 saw outflows totaling $32 million.
- FT: How NFTs became a $40 billion market in 2021.
- Nearly $41 billion was spent on NFTs in the past year.
- The NBA created its own NFT marketplace for video highlights.
- Last year, the traditional global art market was worth $50.1 billion.
The “Everything Shortage”
- Reuters: GM fourth quarter U.S. auto sales drop 43%.
- Semiconductor shortages and supply chain issues slowed production.
- Total sales for 2021 hit 2,218,228 vehicles.
- Bloomberg: Chip delivery times on the rise again.
- The lead time between ordering and receiving chips increased by 6 days.
- It now takes about 25.8 weeks to receive a new computer chip.
- Bloomberg: No end in sight for auto sales slump.
- Auto sales had their worst second half since the Great Recession.
- Inventories are 1.5 million units behind 2020 and 2.5 million behind 2019.
- GM is extending leases for customers who cant find a new car.
- Bloomberg: Futures prices for cotton near decade highs.
- Hedge funds are betting that strong demand will keep supplies tight.
- Chinese manufacturing rose in December — bullish for cotton.
- Cotton prices rose 44% last year, the most since 2010.
Workers Walk Out
- Axios: A record 4.5 million workers quit their jobs in November.
- The job market is hot – especially for workers in lower-wage industries.
- Areas like accommodation, food services & retail have higher quit rates.
- 6.7 million people were hired in November. Workers are switching jobs.
- WSJ: Workers should see job gains even with latest Covid-19 wave.
- Demand for new employees is still very strong.
- Unemployment rate expected to have ticked down to 4.1% for Dec.
- FRED: Covid spike in unemployment didn’t cause higher delinquency rates.
- When jobs disappear, consumers typically miss credit card payments.
- During the most recent recession credit card delinquencies fell.
- Government assistance and stimulus programs helped.
