We wanted to put out a quick mid-month missive due to the continued volatile environment (world) we all find ourselves in. This week, we finally saw the Fed begin to raise rates a quarter point and hinted at 7 more .25 rate hikes this year while also stating they intend to begin tapering their massive balance sheet (chart below) after the next scheduled meeting commences, which is May 4th. They very likely would have raised rates by 50bps on Wednesday had it not been for all the uncertainties surrounded by the Russian invasion of Ukraine.
It was this line from the press release that really confirmed their hawkish stance was not going away anytime soon:
“Many FOMC participants feel compelled to raise Fed Funds rates above neutral rates”
“The Fed put” has been championed by bulls for years now. Meaning, the Fed is cognizant of the stock market gyrations and its psychological effect on the population. Also, as erroneous as it is, they feel the level of the stock market is a reflection of how well they are faring. But given the NASDAQ has already dropped 20% in 2022, without nary a flinch from the Fed, we would argue stocks would have to move a lot lower for any type of significant policy revisions.
There are many who are claiming commodities have seen their parabolic move (oil to 140 then 95) and are now poised to settle back into lower trading ranges, especially if there is any sort of peaceful resolution out of Ukraine. However….
Let’s say you are China. You just saw the world essentially erase Russia’s reserves with a stroke of a pen. China currently has $3.3 trillion in FX reserves invested in Western debt. Couple that with a 7.9% inflation rate that is already ravaging their holdings and all of sudden shifting a portion of that debt into hard goods doesn’t seem as far-fetched as it did say 1-year ago.
So, yes, commodities have already been on quite a tear in the past few months. But if central banks and foreign treasuries begin to make the shift from obligations (debt) to hard assets (commodities) then the “new” FANG (chart below) still has plenty of room to run.
As we begin to wrap up the first quarter of 2022, here are a few quick observations:
- The precious metals continue to shine (sorry), and we remain bullish silver and have been actively trading gold. Refer to the China reserves above, and we could sew a parabolic move in the metals in 2022. And it sure would be ironic to see the metals run as the Fed began to tighten. Seeing as they did practically nothing during the massive easing phase.
- The crypto world continues to flounder. While not falling dramatically, they tight ranges and lack of emotion in the markets certainly has us perplexed. Recent mandates from the Biden administration are a positive in our view. There is more regulatory news coming out of the EU soon.
- Stocks are in a bear market and have been for a while now. Yes, technically the indices are still not in a 20% correction, aside from the NASDAQ which briefly was. But individual names have been decimated to the tune of 50-80% drawdowns from highs. The days of trading at 30x sales or 50x revenue are over. Especially in a higher rate environment.
Is this the new FAANG trade?:
A – Apple
G – Google
A – Aerospace
G – Gold/precious metals
Occasio Partners, LLC 465 California Street, San Francisco, CA