The Fed Readies a New Game of ‘Monetary Jenga’

Commentary For the second time of his tenure, Federal Reserve Chairman Jerome Powell is about to embark on what I have previously described as a game of “Monetary Jenga.” The first, as you may recall, occurred immediately upon Powell taking the reins at the central bank. Ironically (given what has followed, especially in just under the last two years), he immediately began an attempt at “normalizing” monetary policy back then in early 2018 after giving both a warning and a history lesson. Powell rather eloquently told us he was embarking on a methodical, well-telegraphed course of both “quantitative tightening”—actually reducing the size of the Fed’s own balance sheet—and interest rate hikes to try to avoid the mistakes the Fed itself caused in the two prior big busts: in 2000 and 2008. It was by allowing overly lax monetary policy and the inflating of too many bubbles—“imbalances” has always been Powell’s favorite euphemism—in those prior episodes that led to the inevitable deflationary busts. And those deflationary busts especially hurt Joe Sixpack and Sally Soccer Mom, who normally didn’t take as much part in the fun on the way up as did the most well-heeled investors… but who suffered when the economy overall got hit as those bubbles burst. For almost a year Powell did his thing. But when—for the second time of the year; a nasty correction also marked the start of 2018—markets rebelled at the end of that year, Powell ran up the white flag. He’d had enough of tempting all those market monsters, the creations of the Fed and its modern-day asset inflation regimen. Markets didn’t want him or the Fed to pull out any more sticks in their “game.” Now, the Fed is readying this week to put action to all its recent talk of needing to once again undo at least some of the massive monetary stimulus of the recent past; oceans of money in the name of fighting the Plandemic that has dwarfed anything that has ever come before. At the least the Fed will lay out more of a definitive framework for what it presently anticipates will be multiple rate hikes over the course of 2022, together with a new attempt at unwinding some of its bloated balance sheet. But it won’t surprise me if the Fed goes further than expected: raising rates before the next official meeting in March and/or beginning to do so in 50 basis point increments rather than 25. Some of those “market monsters” are already rebelling at these prospects. And with signs growing of late that the Fed is willing to tolerate more pain for overextended investors in the name of knocking down the inflation that affects many more consumers/voters, the swoon of recent days is probably but the beginning of not just a correction, but the first cyclical bear market in some time. The Fed seems to think it can pull out multiple sticks/make multiple tightening moves, given that it first injected so much liquidity into markets and the economy. Whether it is correct in that assessment—or the whole game implodes along the way—remains to be seen. But as with so many times in the past, the Fed may well overdo things in this direction, too, and break something in the markets/economy after first having fallen so woefully behind in this inflation surge. Few stocks and sectors have been spared in the recent selling. So investors have been best served by keeping a lot of powder dry (meaning, holding a lot of cash)… focusing on the best individual stories where stocks are concerned and sitting tight… and more broadly hedging/betting against the most overextended areas on Wall Street. On that latter especially, look at “inverse” ETFs such as the ProShares UltraPro Short QQQ (Nasdaq-SQQQ) which is a leveraged, inverse bet against the Nasdaq 100 stocks and the like. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times. Follow Chris Temple has set himself apart with his unique ability to make the intricacies of the markets and our world understandable to the average person, chiefly via his newsletter The National Investor.  With over five decades in the financial and investment world, his commentary has appeared in Barron’s, Forbes, Investors’ Digest, among other publications. To discover how to get his proprietary research in the paid newsletter service, go to The National Investor.

The Fed Readies a New Game of ‘Monetary Jenga’

Commentary

For the second time of his tenure, Federal Reserve Chairman Jerome Powell is about to embark on what I have previously described as a game of “Monetary Jenga.”

The first, as you may recall, occurred immediately upon Powell taking the reins at the central bank. Ironically (given what has followed, especially in just under the last two years), he immediately began an attempt at “normalizing” monetary policy back then in early 2018 after giving both a warning and a history lesson.

Powell rather eloquently told us he was embarking on a methodical, well-telegraphed course of both “quantitative tightening”—actually reducing the size of the Fed’s own balance sheet—and interest rate hikes to try to avoid the mistakes the Fed itself caused in the two prior big busts: in 2000 and 2008. It was by allowing overly lax monetary policy and the inflating of too many bubbles—“imbalances” has always been Powell’s favorite euphemism—in those prior episodes that led to the inevitable deflationary busts.

And those deflationary busts especially hurt Joe Sixpack and Sally Soccer Mom, who normally didn’t take as much part in the fun on the way up as did the most well-heeled investors… but who suffered when the economy overall got hit as those bubbles burst.

For almost a year Powell did his thing. But when—for the second time of the year; a nasty correction also marked the start of 2018—markets rebelled at the end of that year, Powell ran up the white flag. He’d had enough of tempting all those market monsters, the creations of the Fed and its modern-day asset inflation regimen. Markets didn’t want him or the Fed to pull out any more sticks in their “game.”

Now, the Fed is readying this week to put action to all its recent talk of needing to once again undo at least some of the massive monetary stimulus of the recent past; oceans of money in the name of fighting the Plandemic that has dwarfed anything that has ever come before. At the least the Fed will lay out more of a definitive framework for what it presently anticipates will be multiple rate hikes over the course of 2022, together with a new attempt at unwinding some of its bloated balance sheet.

But it won’t surprise me if the Fed goes further than expected: raising rates before the next official meeting in March and/or beginning to do so in 50 basis point increments rather than 25.

Some of those “market monsters” are already rebelling at these prospects. And with signs growing of late that the Fed is willing to tolerate more pain for overextended investors in the name of knocking down the inflation that affects many more consumers/voters, the swoon of recent days is probably but the beginning of not just a correction, but the first cyclical bear market in some time.

The Fed seems to think it can pull out multiple sticks/make multiple tightening moves, given that it first injected so much liquidity into markets and the economy. Whether it is correct in that assessment—or the whole game implodes along the way—remains to be seen. But as with so many times in the past, the Fed may well overdo things in this direction, too, and break something in the markets/economy after first having fallen so woefully behind in this inflation surge.

Few stocks and sectors have been spared in the recent selling. So investors have been best served by keeping a lot of powder dry (meaning, holding a lot of cash)… focusing on the best individual stories where stocks are concerned and sitting tight… and more broadly hedging/betting against the most overextended areas on Wall Street. On that latter especially, look at “inverse” ETFs such as the ProShares UltraPro Short QQQ (Nasdaq-SQQQ) which is a leveraged, inverse bet against the Nasdaq 100 stocks and the like.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


Follow

Chris Temple has set himself apart with his unique ability to make the intricacies of the markets and our world understandable to the average person, chiefly via his newsletter The National Investor.  With over five decades in the financial and investment world, his commentary has appeared in Barron’s, Forbes, Investors’ Digest, among other publications. To discover how to get his proprietary research in the paid newsletter service, go to The National Investor.