Just when I thought 2022 couldn’t get any stranger, my inflation research led me to a bold but inescapable conclusion. We’re living a financial prophecy foretold by the gameshow The Price is Right.
Cliff Hangers, to be specific, teaches the 2022 monetary scene perfectly.
The contest features a climber moving from left to right along an upward-sloping mountain, with a scale of 0 to 25. The contestant bids on a few household items, and the climber moves by the number of dollars the guess misses by.
A perfect bid and the climber will stay put. Off by $10, and the climber will move up 10.
The gameboard is, well, basically a smoothed-out version of this chart below. Which includes an arbitrary scale of $2 trillion to $9 trillion:
The Fed’s Cliff Hanger Board
We’ll come back to the Federal Reserve’s balance sheet, which has grown from $2 trillion to nearly $9 trillion since 2009, in a moment. First, back to Cliff Hangers and The Price is Right.
Our contestant wins the game if they can keep the climber on the mountain. This is achieved with a score of 25 or less, as expertly displayed by contestant Laura:
Well done, Laura! We hope you enjoyed your prize.
Her predecessor Lana wasn’t as successful. Back in 1982, she missed out on a romantic trip to Tahiti when she greatly underbid a $56 corn popper:
(YouTube commenters speculate that the 2022 price of the popper must be $150+. I checked, and you’ll never believe it. Today the list price on Lana’s loss-inducing WestBend popcorn machine is just $47. How soon we forget that we’ve seen massive deflation in many household products for decades.)
Oh what Fed Chair Jay Powell wouldn’t give for lower price tags like these across America! Today, Jay is looking more like Lana than Laura.
Inflation is running as hot as it’s been since Lana lost out on Tahiti. The $9 trillion number on the Fed’s balance sheet looks like the equivalent of a 50 score in Cliff Hangers.
Powell is (finally) trying to reign this number in to calm inflation. He’s shedding assets and raising rates. This is the responsible thing to do, because it sops up all the extra money sloshing around.
The problem for Jay is that the stock market likes liquidity. When it sniffs out tightening, it’s like my four-year-old’s playbook and throws a big freaking fit:
Jay Powell Pushed Too Far
Sure, the Fed has been printing money since the Financial Crisis. But Jay really overdid it in 2020 and 2021 and now he’s mopping up the mess.
Until prices calm down and the Fed calms its tightening, cash is the best place to be. I know, I’ve been praising plain dough so often I’m sure you’re sick of it. We sold the brief May bounce. And more recently we kicked off the month of June with another “cash is king in ‘22” reminder:
“We’ve been extolling cash in these pages since the start of this year. As the Federal Reserve prepared to pause its money printer, we contrarians booked profits and stacked dollar bills.
We need to be nimble and ready to buy. The best deals happen at the end of bear markets.”
I offered some space under my mattress for those that needed it. Anything to keep a fellow contrarian from buying a “safe” bond fund that was about to get popped in the face.
Let’s admit it because nobody else will. It is impossible to find a successful long strategy in a crashing market. Think back to 2008. The only assets that gained were the US dollar and US Treasuries.
But Treasuries are not the answer in 2022. The bond market in 2022 has had its worst start since 1788, according to a lead economist at Nasdaq.
Markets usually overshoot to the upside and downside. The end of this bear market, however, will probably be ugly. The biggest losses are typically reserved for the end of a down move. Wags call it “capitulation,” when everyone throws in the towel and sells.
(Vincent Deluard, Director of Global Macro for StoneX, aptly said that the “easy” 20% loss is behind us. The challenging 20% is yet to come.)
I agree that the market has 10% to 20% more downside, and I’d prefer to wait it out in cash. When we do see signs of a final capitulation and reversal in Fed policy, you’ll hear from me.
The Fed will one day become our friend again—but not as early as bottom fishers hope for. Inflation may come down, but I don’t see it dropping below Powell’s goal of 2% any time soon.
Which means Jay has some work to do before he can climb Bull Mountain once again!
Until then, it’s best to wait out this tightening cycle. In the meantime, you are more than welcome to stash cash under my still-outperforming mattress.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.