December 31, 2021
We closed out the year in good fashion as the trends of the past few months remain in place: consumer prices continue to rise; consequently, longer-term interest rates are moving higher, and the unprofitable high-flying stocks continue to plunge. As you’ve heard me say, when prices surge excessively on Main Street, stocks tank (slide 1 below). This is exactly what is happening to the former darlings of the market, the unprofitable growth stocks and the meme stocks. The larger, more established companies are still holding up the major stock market averages. However, to stop prices from rising on Main Street, the Fed will need to tighten monetary policy more forcefully, and this will cause even the blue-chip companies to drop. As the tech (2000) and housing (2008) bubbles burst, the blue-chip companies dropped 40-50% on average.
This week, IKEA, the world’s largest furniture manufacturer announced across-the-board price hikes which averaged 9%. Jeff Harmening, CEO of General Mills, the maker of Cheerios, Yoplait, and the Betty Crocker stable of products, described the current pricing environment as the most challenging he has seen in his 27+ years in the food industry. He is seeing cost pressure of 8-9% vs. his prior expectation of 7-8% in his current fiscal year, which ends next June. Much of these costs will be pushed through to the consumer. This is what happens when there is a pandemic, and the central bank doubles the amount of cash in the economy (slide 2 below). In fact, leaving aside money market funds with check writing which shouldn’t have a material effect on the calculation, over 50% of all the dollars in existence today were created out of thin air during the past two years. No mystery to me as to why prices are rising everywhere on Main Street and why stock prices have risen so much.
Make no mistake; this nightmare will not end as the bottlenecks are worked out, unless at the same time, the Fed sharply reverses its easy-money scheme. Otherwise, the bottlenecks will dissipate, but the price hikes will remain painfully with us at unacceptable levels, though perhaps not at the current 6% year-over-year pace.
As I said in the fall, it is checkmate for the Fed. Over the past couple of years, they have triggered an increase of nearly $1.5 trillion/year in new cash to prop up the financial markets and to pay for the extra government programs during the pandemic. The bill for this largesse is coming due in the form of higher prices on everything that we buy. The politicians are now getting serious blowback on their inflationary policies, even though the public doesn’t fully understand the root cause. People are feeling pain at the grocery checkout counter and at the gas pump. Biden is feeling the heat, and the skyrocketing prices are now threatening the midterm elections for the Democrats. Elizabeth Warren and the White House are trying to cast the blame in part on what they characterize as greedy corporations who allegedly are gouging consumers. However, these charges, which are untrue, are not gaining much traction. More people are beginning to realize that the Fed has simply printed too much money. Thus, the only way out for the Fed is to tighten monetary policy.
Tight money does not mix well with juiced-up stock prices. Accordingly, we are seeing the turmoil begin with stocks like Robinhood, AMC, DraftKings, Beyond Meat, DoorDash, and the ARKK ETF, and it will spread. As I’ve said, I think cryptocurrencies are candidates for an imminent shakeout. They are already dropping, and I believe they will get hammered in the end.
Insiders and corporate executives continue to cash out en masse (slide 3 below). Valuations on stocks remain at treacherous, nosebleed levels (slides 4-6 below). Given that the Fed will stop, and must stop, adding nearly $1.5 trillion/year of newly printed dollars to juice the markets and the economy, stock and bond prices will continue to stumble. I know I don’t need to remind you that the Fed’s money printing has been a major reason that the stock market has risen meteorically over the past few years. Now, the environment of tightening liquidity and massively overvalued stocks, creates tremendous opportunity for our short-selling strategy in 2022, as stock prices move lower towards more rational valuations.
Happy New Year and best wishes for a healthy and prosperous 2022!
Best,
Bob
Bob Klein | Medici Capital
Founder/Chief Investment Officer
520 Newport Center Dr., Suite 620
Newport Beach, CA 92660
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