7-Chart Sunday (12/19/21)

By Charlie Bilello

19 Dec 2021

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7 charts from the past week that tell an interesting story in markets and investing…

1) The Beginning of the End of Easy Money

The FOMC meeting this week went largely as expected:

While the Fed’s balance still hit another new high this week at $8.757 trillion, continued increases are on borrowed time (QE is expected to end by March 2022). This is the beginning of the end of easy money.

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2) Throwing Fuel on the Fire

2021 will go down in central bank history as the year in which monetary policy was most at odds with economic data.

With a 6.8% inflation rate (highest since 1982) and a 4.2% unemployment rate (vs. 5.8% historical average), the Fed held interest rates at 0% and added over $1.3 trillion in assets to its balance sheet this year.

The real Fed Funds Rate of -6.7% is the lowest we’ve seen since 1974.

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Why is the Fed still buying mortgage bonds with home prices up 20% (highest rate of increase ever) and rents up 18% (highest rate of increase ever).

This is a question many have been asking for months.

Jerome Powell summed up their answer nicely in the FOMC press conference, saying “markets can be sensitive to it.” What does that mean?

The Fed has been more afraid of the stock market’s reaction to ending monetary stimulus than they are of rising inflation (which they previously dismissed as “transitory”). But that balance finally appears to be shifting.


3) More Money, More Problems?

The 40% increase in the US money supply (M2) over the the past two years is the highest rate of increase we’ve ever seen. At the same time, the US National Debt will soon hit $29 trillion (it can now rise again as the debt limit was raised last week by $2.5 trillion), a $6 trillion increase in less than 2 years.

When we entered 2021, there was little concern over money printing and deficit spending, but inflation seems to have changed the zeitgeist. Borrowing from the future to spend more today is now viewed with increasing skepticism, and as a result the $1.75 trillion “Build Back Better” plan does not have the votes to pass.

4) When Does Inflation Become a Problem?

Why is inflation increasingly being viewed as a problem? Workers are starting to notice that the rise in their earnings is failing to keep up with the rise in consumer prices. When real wage wage growth turns negative as it has today, that translates into a decline in your standard of living.

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5) The Great Normalization Has Begun

While the Fed has been slow to respond to rising inflation, many countries have been more aggressive in normalizing policy, particularly in emerging markets that know all too well the harmful effects of an inflationary spiral.

Brazil and Russia have both hiked rates 7 times this year while Mexico has hiked 5 times. Norway and the UK (Bank of England) have also started hiking, becoming the first G10 countries to do so.

(Note: Highlight = Central Banks That Have Hiked Rates in 2021)

What happens if you fail to combat rising inflation and lose credibility as a central bank? You risk a collapse in your currency as we’re seeing in Turkey today, which has been cutting rates even as inflation spikes higher…

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6) The High Growth Boom and Bust

Remember the 2020 meme “stonks only go up?”

Stonks only go up - Stonks Only Go Up | Make a Meme

Well, as it turns out, they do go down from time to time…

7) A Kodak Moment

Before GameStop and AMC there was Kodak, which saw its shares spike 23x in just 2 days after it was reported to receive a $765 government loan to start producing pharmaceuticals.

The loan never came to fruition, however, and today the stock is down 92% from the height of the mania.

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And that’s it for this week.

Have a Merry Christmas and Happy Holidays!


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