The Fed Is Completely Bifurcated!

The Outlook For 2022 Part 2

I am a total money freak. Sure, I like money but I am a freak over monetary policy. Here is what is going to happen and how it will affect markets.

The Fed has said they will increase interest rates three times in 2022. For reasons below, I do not think they will raise that much.

They look at inflation and see that it is too high but they think it is transitory. But the transitory phase of higher volatile prices like commodities is about over. We are now going into Phase two where sticky forms of inflation are accelerating. These include wages and rents. They go up but rarely go down and it would take a severe recession to cause that to happen. So inflation will stay high for at least two years. And the only cure is a recession caused but tighter monetary policy.

The Fed has put interest rates at zero and pumped $120 billion a month into the system. However, due to some arcane reasons, banks have withdrawn $1.6 trillion in 2021, thus offsetting the Fed’s money pump. Thus, Fed policy has not been as loose as people think, thus the price of gold suffering.

The Fed will start the rate hike regime by the middle of the year. But that will shock a system used to the constant sugar high of Fed money. The Fed says they will hike another two times in 2022 and cut back their quantitative easing.

But the global financial system can’t handle that.

Debt is at astronomical levels. Everybody knows about the $28 trillion in Federal debt but corporate debt is also at an all time high. Personal debt is not as high as 2008 but is getting close. Global debt has never been higher.

Many markets are in bubbles caused by loose money policies of the Fed:

• Housing

• Crypto

• NFTs

• Collectibles

• And so on

Those will be the first markets to suffer when the Fed shifts policy. Three hikes this year would be a death knell for these markets.

In addition, the stock market will stagger. I’ll get back to the stock market in a few days. But Fed tightening is clearly a bad piece of news for the stock market.

I believe that changes in pressure are more important than the pressure. The sharp change in Fed policy is a big change in policy and will shock many markets around the world. Combine that with many other central banks and you will have massive changes in markets in the coming year. And they won’t be pretty.

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