Analyst Sees Evidence these Sectors are Just Beginning to Benefit from Reduced Mandates

 

Has the door finally been kicked open on the post-pandemic trade?

While investors are watching inflation numbers and interest rates, there is an underlying story that could be very meaningful to the services and hospitality sectors. New York just announced it is lifting much of its indoor mask mandate as it joins a growing list of states that are speeding toward allowing individual choice. The impact of ever more consumers venturing out to restaurants, bowling alleys, vacation destinations, bars, etc., and then opening their wallets, may finally be creating an oversized opportunity. As the covid trade is seen unwinding and the post covid possibilities are presenting themselves, spending will shift, and so should investments.

In a research note released by Bank of America’s economist, Anna Zhou writes that credit card spending overall has seen “a noticeable uptick in the last two weeks.” Card spending was up 20.2% above the levels recorded the same week (ending Feb. 5) of 2020 and up 12.3% compared with the same week in 2021. Zhou reports this spending included an “across the board improvement in spending for airlines, lodging, entertainment services, and restaurants. Within the categories, entertainment spending climbed from 20% below the 2020 level to just 5% below. Restaurants and bars rose from 10% above 2020 levels to 18% above. The note indicated that gyms are also seeing improvements and any sector that benefits from older Americans with reduced fears for their safety could see increased traffic. 

The data and insights offer an indication that the rotation toward the industries mentioned by Zhou may be in for a boom period regardless of how the rest of the market behaves. As the last months of winter play out, people are likely to escalate their playtime in ways they have been prevented from for two full years.

There are hundreds of stocks in B of A’s category list. Below are four interesting companies that are each unique to their categories and may belong on your watchlist.

Travelzoo (Nasdaq Global: TZOO)  is a media company that provides travel, entertainment, and local deals to its 30 million members worldwide. The company distributes travel “deals” through its Travelzoo website, newsletters, and smartphone apps. In addition, it provides travel content to third-party websites and media outlets. The company benefits from over 2,000 travel-related advertisers including airlines, hotels, cruise lines, vacation packages, tour operators, attractions, rental car companies, restaurants, spas, and tourism-related companies.  

Read the most recent Noble Capital Markets research
on TZOO including price targets.

Bowlero Corp. (NYSE: BOWL) is the worldwide leader in bowling entertainment. With more than 300 bowling centers across North America, Bowlero Corp. serves more than 26 million guests each year through a family of brands that includes Bowlero, Bowlmor Lanes, and AMF. Bowlero Corp. is also home to the Professional Bowlers Association, which it acquired in 2019. BOWL is the completed SPAC of Isos Acquisition Corp.

Read the most recent Noble Capital Markets research
on BOWL including price targets.

RCI Hospitality Holdings, Inc. (Nasdaq: RICK) through its subsidiaries, owns and operates gentlemen’s clubs and sports bars/restaurants within two segments Nightclubs and Bombshells. It also operates a communications company serving adult nightclubs and the adult retail products industry. The Company operates approximately 48 establishments that offer live adult entertainment, and/or restaurant and bar operations.

Read the most recent Noble Capital Markets research
on Rick including price targets.

FAT Brands (NASDAQ: FAT) is a leading global franchising company that acquires, markets, and develops fast-casual, quick-service, casual dining, and polished casual dining concepts around the world. The Company currently owns 17 restaurant brands: Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli’s, Twin Peaks, Great American Cookies, Hot Dog on a Stick, Buffalo’s Cafe & Express, Hurricane Grill & Wings, Pretzelmaker, Elevation Burger, Native Grill & Wings, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses, and franchises over 2,300 units worldwide.

Read the most recent Noble Capital Markets research on
FAT including price targets.

Take-Away

It’s impossible to know if this wave of consumers that feel more comfortable stepping from their homes will grow or if another surprise will cause them to be hesitant to treat themselves to a night of entertainment, dinner, or recreation. However, the trend toward opening the doors appears stronger than it has been since the start of lockdowns.

Bank of America economist Anna Zhou included in her note, “Overall, we expect consumers to further unleash their spending power in the coming months as the services sector continues to reopen.”

 

Paul Hoffman

Managing Editor, Channelchek

 

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Sources

https://www.npr.org/2022/02/09/1079555193/new-york-new-jersey-end-mask-mandate-ending

https://www.barrons.com/articles/as-omicron-fades-services-spending-surges-as-americans-venture-back-out-51644516197

https://channelchek.vercel.app/aux/(expanded:check-channels)

 

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A Nudge to Resume Economic Activity

 

Peter Dizikes | MIT News Office

In these pandemic-affected times, concern about Covid-19 can make it hard to know when to take part in “normal,” prepandemic activities. That may be especially true this winter, with the Omicron virus variant spreading and its severity still being studied.

But even at times during the pandemic when cases have been falling, there is often uncertainty about which activities are most ready for resumption. To some extent, people may form judgments about this based on social cues. If a lot of your neighbors start going to restaurants again, does it make you more likely to avoid restaurants, knowing they might be more crowded? Or might it signal that dining out is becoming safer?

A field experiment of citizens in the city of Zhengzhou, China, conducted by an MIT research team in the spring of 2020, shows that people tend to have the latter reaction. When study respondents were informed that their neighbors were going out to restaurants, the proportion of participants also doing so increased by 12 percentage points, or 37 percent. The primary factor inducing this change appears to be evolving risk preferences: Perhaps paradoxically, people considered the activity to be safer knowing their neighbors were partaking in it.

Given improving conditions, knowing what other people in a social network are doing could thus be a useful signal. At any rate, the study suggests that many people do have the tendency to increase activity, not decrease it, when informed that others are themselves increasing activity.

“When we implemented our experiment, [Zhengzhou] had zero Covid cases,” says MIT Professor Siqi Zheng, part of the research team and co-author a new paper detailing the study’s results. “The city government had loosened the lockdown measures and dining out services were allowed to reopen. However, most people were reluctant to resume economic activities, perhaps because they were not sure whether it was really safe or not.”

Zheng adds, “We felt that in [some] uncertain times, such information might be particularly valuable: If others think it’s safe to go out, then maybe I should feel safe. To be sure, we were also prepared for the opposite reaction, that people would hunker down and try to avoid crowds.”

Instead, “The intervention motivated individuals to resume patronizing restaurants,” says Juan Palacios, a postdoc at the Center for Real Estate and the Sustainable Urbanization Lab (SUL), and another co-author of the paper. “When individuals learned that their neighbors were planning to go out, they followed suit.”

As such, the researchers regard the experiment as a possible low-cost intervention governments could pursue, to help ramp up consumer activity when merited by improving conditions during the pandemic.

The paper, “Encouraging the resumption of economic activity after COVID-19: Evidence from a large scale filed experiment in China,” was published online today in Proceedings
of the National Academy of Sciences.

The paper’s authors are Yuchen Chai, a researcher at SUL; Yichun Fan, a PhD candidate in MIT’s Department of Urban Studies and Planning (DUSP) and researcher at SUL; Palacios; David Rand, the Erwin H. Schell Professor and Professor of Management Science and Brain and Cognitive Sciences at MIT; Weizeng Sun of the Central University of Finance and Economics, in Beijing; Jianghao Wang, an associate professor at the Institute of Geographic Sciences and Natural Resources Research, Chinese Academy of Science, in Beijing; Erez Yoeli, a research scientist at the MIT Sloan School of Management; and Zheng, who is the Samuel Tak Lee Champion Professor of Urban and Real Estate Sustainability at MIT and faculty director of the MIT Center for Real Estate and SUL.

To conduct the study, the researchers worked with 622 participants from Zhengzhou for several weeks in the spring of 2020, soon after China’s initial Covid-19 lockdown was lifted. All participants were asked to state their belief, on a weekly basis, about the percentage of their neighbors who were planning to go to restaurants that weekend. They also downloaded an app, designed for the study, that tracked their whereabouts using GPS data.

One half of the group received an additional piece of information: The actual percentage of their neighbors who were planning to dine out on any given weekend, the kind of fact social scientists call a “descriptive norm.” This percentage was derived from a separate survey conducted in the same location.

By comparing the weekend activities of the two groups, the researchers found people in the group that learned the real percentage of neighbors dining out would, in turn, go to restaurants considerably more often.

“We use a descriptive norm experimental design, a well-established method in psychology,” Rand says. “Given that the nudge is relatively simple to implement and practically free, we think it might come in handy for others trying to promote reopening.”

In another facet of the study, the researchers were also able to determine that the decision-making of participants was heavily based around risk perceptions. The scholars conducted the same experiment to see if participants would also be more willing to go to public parks — but found the intervention made virtually no difference in behavior, in that case, because people already regarded public park visits as a safe activity.

Other scholars say the findings are a useful contribution to the growing literature on public behavior and risk perception during the shifting cycles of the Covid-19 pandemic.

“This work is both timely and important, especially because the Omicron variant is creating additional uncertainty and hesitation amongst the public worldwide,” says Noah Goldstein, a professor of management and organizations at the University of California Los Angeles’ Anderson School of Management. If vaccines and other measures can ultimately bring an end to the pandemic, governments and businesses may seek solutions to encourage people to resume activity that is vital to people’s livelihoods and to the economy in general, he says. “The researchers’ messaging intervention provides such a solution, one that is both inexpensive and very scalable.”

As the researchers acknowledge in the paper, the study was “run in just one setting at a very particular moment in time,” so caution “needs to be taken when generalizing our results to other cultures and time periods.” It is also possible that the varying availability of vaccines, which first reached the public several months after the spring of 2020, may alter risk perceptions as well.

“We do recognize that it won’t always work as well as it did for us,” Yoeli says. “It’s probably best to try it in settings where people are really unsure about the safe course of action.” Still, he adds, “The simplicity and generic aspect of this intervention allows policymakers to use our design and implement it in their communities, across the world.”

 

Suggested Reading

How the Fed is Moving Ever so Slowly Toward Normalcy

Bill Ackman Says ESG Investing Contributes to Inflation

Why a Less Dovish Fed Doesn’t Translate into a Hawkish Fed

Money Supply is Like Caffeine for Stocks

 

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	Image Credit: Yosuke Muroya (Flickr)

Fed Tightening Causes Hedge Fund Manager to Consider SPACs a “Best Idea for 2022”

 

Investments that are less understood tend to trade at a discount. As investors come to understand them, and how to value them, the market becomes deeper and more liquid. Knowing that there will be a buyer or a seller to take the other side of a trade is worth quite a bit. Boaz Weinstein is the Founder and chief investment officer of the hedge fund Saba Capital. He believes that SPACs are still misunderstood and undervalued. Boaz also has told Bloomberg that these stocks may be a good sector to consider as the Fed tightens.

Mr. Weinstein gained recognition in the early and mid-2000s when he worked at Deutsche Bank. He is especially known for his credit default swap trading strategies.

At a “Best Ideas for 2022” webinar hosted by Saba on Friday (January 28) Boaz explained that he believes, “SPACs are misunderstood because they’re fixed-income products.”  He explained, special purpose acquisition companies, or SPACS, were popular early in 2021 but their popularity faded as regulators began to scrutinize aspects of their structure.

An attractive part of SPACs structure, Weinstein argues, is they can be bond-like and earn interest on behalf of the owners pre-merger. Another aspect of SPACS is that they are sold with warrants that can have interesting returns either if they’re sold immediately or if the company rises in value.

The IPO and SPAC market doesn’t have the significant tailwinds they benefitted from with their popularity a year ago. According to Bloomberg, the Saba CIO has invested in more than 400 SPACs since October 2021. Weinstein has been investing in SPACs for more than a decade, holding about 7% of the market in 2006, when it was valued at $15 billion. Today, the market is more than 10 times as big as it was 15 years ago, Weinstein estimates he holds about 1% of it.

While analysts debated whether inflation is transitory or persistent, the Saba CIO explained at a Robinhood Investor Conference held last year, “If you were going to buy a 5-year bond because a 75 basis point yield was enough to excite you or a 10-year at 1.45%, you’re taking significant risk that inflation is not transitory or that people fear that it’s not transitory.” Weinstein said warned higher inflation erodes the value of fixed-income investments. Meanwhile, SPACs often trade at a discount to the escrow and earnings on the assets held in trust on behalf of the investors.

 

Suggested Reading

Irrational Pessimism – Why Value Investors Should Research Individual SPACs

Long Term Retirement Money and Fledgling Companies

Optionality – The Different Ownership Paths Before the De-SPAC Period

Analysis of a Special Purpose Acquisition Company

 

Sources

https://www.bloomberg.com/news/articles/2022-01-28/saba-s-weinstein-recommends-spacs-cds-as-fed-tightens

https://www.barrons.com/articles/spacs-boaz-weinstein-hedge-funds-investing-51624308161

http://ill.mbc.mybluehost.me/our-strategies/#spacs

 

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Could Telsa’s Robots Permanently Eliminate Labor Shortages?

 

Motivational experts tell us that if you have a goal you want to achieve, write it down, then it becomes better defined and “real.” They also tell us, if you tell others what you’re going to achieve, you’ll be even more likely to succeed. Elon Musk does this. He announces plans to provide something dramatic, like a Cybertruck, fully self-driving car, a colony on Mars, or a robot, years in advance; then he provides ongoing updates. Tesla’s earnings call this week provided him an opportunity to update us on the importance and status of the robot project.

 

Optimus

Optimus (Latin for “best”) is the “code-name” given to this  project at Telsa. Developing a robot to do dangerous, boring, or repetitive tasks would, in the mind of Tesla’s founder, revolutionize the economy, he believes there would not be labor shortages.   “If you think about the economy, it is — the foundation of the economy is labor,” he said. “Capital equipment is distilled labor. So what happens if you don’t actually have a labor shortage? I’m not sure what an economy even means at that point. That’s what Optimus is about, so [it’s] very important.”

Musk said Wednesday (January 26) he expects the Tesla-Bot could take years to come to market and perhaps will never become fully realized. The goal is to create a machine that can do what can now only be carried out by humans. While advances over the years in robotics have allowed a reduction in workers, there are still limitations with current machines that use existing technology.  Many more tasks will be done by robots in the future.

Elon the Showman

The Optimus robot project is the most recent example of Musk announcing his goals publicly, and with typical fanfare and showmanship. In addition to keeping himself on task, his announcing exciting Tesla (or SpaceX) products, envisioned for years into the future, helps to energize employees, excite customers, and of course, attract investors.

 

An Interesting Four-Year-Old Elon Musk Quote from The Boring Company Website The rumor that I’m secretly creating a zombie apocalypse to generate demand for flamethrowers is completely false — — Elon Musk (@elonmusk) January 28, 2018

 

The goals that Musk has in the past set out for any one of his companies, like building EVs for the masses, or reusable space-bound rockets, often require innovation that has not even been fully envisioned. For this reason, he often falls behind on many announced projects. Consumers and investors awaiting products have grown accustomed to delays that often last years. One of many examples of this was the “Autonomy Day” event in April 2019, Musk said the company would have one million autonomous “robotaxis” on the road in 2020. If you’re still waiting for a robotaxi to take you to the airport, you are many more years away from the experience.

About Optimus

The “Tesla Bot” is the “most important product” that Tesla is developing this year, said Tesla’s CEO on Wednesday’s fourth-quarter earnings call. This places it on the priority list ahead of the Cybertruck, Robotaxi, and other vehicles, including the Semi and the new Roadster. The Tesla Bot, “[it] has the potential to be more significant than the vehicle business over time.”

Take-Away

One thing that can be learned from one of the richest people in the world is how to stay motivated. The other is that failing to meet a goal, timeline, or even follow all the way through is not always important for success. Not unlike investing, where not every trade is a winner, and some securities need to be culled ahead of expectations, running an innovative business does not mean every project is a winner. Some projects need to veer in another direction because of unexpected circumstances, others halted, and others need an even higher priority than originally planned. It is presumed that the next generation of robots will help manufacturing businesses like Tesla. For this reason, a Tesla-Bot is doubly important to the company’s founder.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

Tesla’s CEO Surprises Reporters with Views on Robots, Subsidies, and Longevity

Elon Musk’s Tesla Bot Raises Serious Concerns – But Probably Not The Ones You Think

Robotics and AI Are Being Tapped by Cannabis Growers

Social Skills Would Benefit Physical Skills in Robotics

 

Sources

https://www.inc.com/peter-economy/this-is-way-you-need-to-write-down-your-goals-for-faster-success.html.

https://news.yahoo.com/tesla-optimus-robot-probably-wont-be-a-big-profit-driver-wall-street-thinks-173528019.html).

https://www.boringcompany.com/not-a-flamethrower

 

Stay up to date. Follow us:

Could Telsa’s Robots Permanently Eliminate Labor Shortages?

 

Motivational experts tell us that if you have a goal you want to achieve, write it down, then it becomes better defined and “real.” They also tell us, if you tell others what you’re going to achieve, you’ll be even more likely to succeed. Elon Musk does this. He announces plans to provide something dramatic, like a Cybertruck, fully self-driving car, a colony on Mars, or a robot, years in advance; then he provides ongoing updates. Tesla’s earnings call this week provided him an opportunity to update us on the importance and status of the robot project.

 

Optimus

Optimus (Latin for “best”) is the “code-name” given to this  project at Telsa. Developing a robot to do dangerous, boring, or repetitive tasks would, in the mind of Tesla’s founder, revolutionize the economy, he believes there would not be labor shortages.   “If you think about the economy, it is — the foundation of the economy is labor,” he said. “Capital equipment is distilled labor. So what happens if you don’t actually have a labor shortage? I’m not sure what an economy even means at that point. That’s what Optimus is about, so [it’s] very important.”

Musk said Wednesday (January 26) he expects the Tesla-Bot could take years to come to market and perhaps will never become fully realized. The goal is to create a machine that can do what can now only be carried out by humans. While advances over the years in robotics have allowed a reduction in workers, there are still limitations with current machines that use existing technology.  Many more tasks will be done by robots in the future.

Elon the Showman

The Optimus robot project is the most recent example of Musk announcing his goals publicly, and with typical fanfare and showmanship. In addition to keeping himself on task, his announcing exciting Tesla (or SpaceX) products, envisioned for years into the future, helps to energize employees, excite customers, and of course, attract investors.

 

An Interesting Four-Year-Old Elon Musk Quote from The Boring Company Website The rumor that I’m secretly creating a zombie apocalypse to generate demand for flamethrowers is completely false — — Elon Musk (@elonmusk) January 28, 2018

 

The goals that Musk has in the past set out for any one of his companies, like building EVs for the masses, or reusable space-bound rockets, often require innovation that has not even been fully envisioned. For this reason, he often falls behind on many announced projects. Consumers and investors awaiting products have grown accustomed to delays that often last years. One of many examples of this was the “Autonomy Day” event in April 2019, Musk said the company would have one million autonomous “robotaxis” on the road in 2020. If you’re still waiting for a robotaxi to take you to the airport, you are many more years away from the experience.

About Optimus

The “Tesla Bot” is the “most important product” that Tesla is developing this year, said Tesla’s CEO on Wednesday’s fourth-quarter earnings call. This places it on the priority list ahead of the Cybertruck, Robotaxi, and other vehicles, including the Semi and the new Roadster. The Tesla Bot, “[it] has the potential to be more significant than the vehicle business over time.”

Take-Away

One thing that can be learned from one of the richest people in the world is how to stay motivated. The other is that failing to meet a goal, timeline, or even follow all the way through is not always important for success. Not unlike investing, where not every trade is a winner, and some securities need to be culled ahead of expectations, running an innovative business does not mean every project is a winner. Some projects need to veer in another direction because of unexpected circumstances, others halted, and others need an even higher priority than originally planned. It is presumed that the next generation of robots will help manufacturing businesses like Tesla. For this reason, a Tesla-Bot is doubly important to the company’s founder.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

Tesla’s CEO Surprises Reporters with Views on Robots, Subsidies, and Longevity

Elon Musk’s Tesla Bot Raises Serious Concerns – But Probably Not The Ones You Think

Robotics and AI Are Being Tapped by Cannabis Growers

Social Skills Would Benefit Physical Skills in Robotics

 

Sources

https://www.inc.com/peter-economy/this-is-way-you-need-to-write-down-your-goals-for-faster-success.html.

https://news.yahoo.com/tesla-optimus-robot-probably-wont-be-a-big-profit-driver-wall-street-thinks-173528019.html).

https://www.boringcompany.com/not-a-flamethrower

 

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	Image Credit: Marco Verch (Flickr)

Safe Haven Comparison During Downturns, Bitcoin vs. Gold

 

The jury is still out on whether bitcoin is a safe haven portfolio holding versus more traditional assets like gold, bonds, or even real estate. The world’s first cryptocurrency would seem to meet the criteria that would make it a logical non-correlated asset. These include independence from central bank policies, being a store of value, and it has an established deep market, but it has not been put to the test. Bitcoin history is too short; there are not many data points from which to assess expected future behavior.

Correlation to Stocks

Recent history does provide some insight as to whether bitcoin or gold is more effective during extreme market weakness. The following three charts provide a helpful visual of the comparative performance of bitcoin, gold, and the S&P 500.

 

 

The chart above is of the last three months of 2018. The market sold off sharply November through December in reaction to a U.S. trade war with China, the slowdown in global economic growth, and concern that the Federal Reserve was raising interest rates too fast. The price movement shows that when the market sold off over 13% in just three months, bitcoin moved in the same direction and suffered more than three times the loss (43%). Portfolios holding assets that closely tracked the price of gold were able to mute the negative performance of the equity portion because during this period gold moved higher by more than 7%.

 

 

A little more than a year later, the markets sold off in reaction to the novel coronavirus that placed uncertainty in every aspect of people’s lives and every corner of the economy. This second chart shows that when the market sold off by more than 23% for different reasons than in 2018, bitcoin again moved in the same direction and exceeded equities losses. Gold during this time remained virtually unchanged. This provided portfolios holding the asset class less of an impact from the movement of stocks, bitcoin, or any other asset held.

 

 

The stock market started off 2022 reacting to a change of thinking on how long the Fed would keep monetary policy extremely accommodative. Through January 21^st, stocks are down 8%. Once again following in the same direction. Bitcoin has fallen by more than twice that of equities. For its part, gold is up over 1%, having the effect of providing a safe haven for equity investors that bitcoin did not provide in either this down period or any of the other two that came before it.

Take-Away

Diversifying a portfolio means that you spread risk by holding assets that move independently based on their own factors. A non-correlated portfolio doesn’t swing for home runs, it aims to win by performing more consistently over time. The question of whether bitcoin or younger cryptocurrencies help diversify a portfolio will be answered better as more experiences present themselves over time.

The statistical evidence available today suggests that gold investments as an uncorrelated asset are superior to bitcoin by a wide margin based on the very few times the market has sold off sharply since the birth of cryptocurrencies.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

Will Gold Continue to Outperform in 2022?

Capturing More Performance with Gold Prices Rising

Has Bitcoin Lived Up to its Original Vision?

Cryptocurrencies in 2022, a View from Academics

 

Sources

www.koyfin.com

https://www.wellsfargo.com/financial-education/investing/why-diversify-your-portfolio/

https://www.pbs.org/newshour/economy/making-sense/6-factors-that-fueled-the-stock-market-dive-in-2018

https://www.investopedia.com/terms/s/safe-haven.asp

https://www.sciencedirect.com/science/article/pii/S1544612320304244

www.businessinsider.com/news/currencies/bitcoin-price-positively-correlated-to-stock-market-risk-asset-gold-2022-1

 

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	Image Credit: Marco Verch (Flickr)

Safe Haven Comparison During Downturns, Bitcoin vs. Gold

 

The jury is still out on whether bitcoin is a safe haven portfolio holding versus more traditional assets like gold, bonds, or even real estate. The world’s first cryptocurrency would seem to meet the criteria that would make it a logical non-correlated asset. These include independence from central bank policies, being a store of value, and it has an established deep market, but it has not been put to the test. Bitcoin history is too short; there are not many data points from which to assess expected future behavior.

Correlation to Stocks

Recent history does provide some insight as to whether bitcoin or gold is more effective during extreme market weakness. The following three charts provide a helpful visual of the comparative performance of bitcoin, gold, and the S&P 500.

 

 

The chart above is of the last three months of 2018. The market sold off sharply November through December in reaction to a U.S. trade war with China, the slowdown in global economic growth, and concern that the Federal Reserve was raising interest rates too fast. The price movement shows that when the market sold off over 13% in just three months, bitcoin moved in the same direction and suffered more than three times the loss (43%). Portfolios holding assets that closely tracked the price of gold were able to mute the negative performance of the equity portion because during this period gold moved higher by more than 7%.

 

 

A little more than a year later, the markets sold off in reaction to the novel coronavirus that placed uncertainty in every aspect of people’s lives and every corner of the economy. This second chart shows that when the market sold off by more than 23% for different reasons than in 2018, bitcoin again moved in the same direction and exceeded equities losses. Gold during this time remained virtually unchanged. This provided portfolios holding the asset class less of an impact from the movement of stocks, bitcoin, or any other asset held.

 

 

The stock market started off 2022 reacting to a change of thinking on how long the Fed would keep monetary policy extremely accommodative. Through January 21^st, stocks are down 8%. Once again following in the same direction. Bitcoin has fallen by more than twice that of equities. For its part, gold is up over 1%, having the effect of providing a safe haven for equity investors that bitcoin did not provide in either this down period or any of the other two that came before it.

Take-Away

Diversifying a portfolio means that you spread risk by holding assets that move independently based on their own factors. A non-correlated portfolio doesn’t swing for home runs, it aims to win by performing more consistently over time. The question of whether bitcoin or younger cryptocurrencies help diversify a portfolio will be answered better as more experiences present themselves over time.

The statistical evidence available today suggests that gold investments as an uncorrelated asset are superior to bitcoin by a wide margin based on the very few times the market has sold off sharply since the birth of cryptocurrencies.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

Will Gold Continue to Outperform in 2022?

Capturing More Performance with Gold Prices Rising

Has Bitcoin Lived Up to its Original Vision?

Cryptocurrencies in 2022, a View from Academics

 

Sources

www.koyfin.com

https://www.wellsfargo.com/financial-education/investing/why-diversify-your-portfolio/

https://www.pbs.org/newshour/economy/making-sense/6-factors-that-fueled-the-stock-market-dive-in-2018

https://www.investopedia.com/terms/s/safe-haven.asp

https://www.sciencedirect.com/science/article/pii/S1544612320304244

www.businessinsider.com/news/currencies/bitcoin-price-positively-correlated-to-stock-market-risk-asset-gold-2022-1

 

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	Image Credit: Eric Steinhauer (Pexels)

The Federal Reserve Continues to Equivocate on Crypto

 

The Federal Reserve avoided taking a stance on whether the U.S. should establish a digital currency as legal tender in a report released Thursday (January 20).  It appears to avoid taking a solid position on crypto in general.  The long-awaited paper does, however provide insight into the agency’s thinking. It then stops short of expectations that the report may have established a timeline or roadmap for the U.S. to evolve its definition of money.

The 40-page paper that was promised to be delivered by late Summer 2021 begins with a discussion of existing forms of money, the current state of the U.S. payment system, and its relative strengths and challenges. It then provides information on the various digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. The paper then turns to central bank digital currencies (CBDC), focusing on its uses and functions; potential benefits and risks; and related policy considerations.

The Federal Reserve’s initial analysis suggests that a U.S. CBDC, if one were created,

would best serve the needs of the United States by being privacy-protected, intermediated, widely

transferable, and identity-verified. The paper expressly points out throughout that it is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC. The paper says its purpose is to foster conversation and public comment.  “The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC,” the report read.

 

Source: Money and Payments: The U.S. Dollar in the Age of Digital Transformation, Federal Reserve

 

The Board of Governors of the Federal Reserve also indicated that it would not proceed with the issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific law authorizing the use. “The introduction of a CBDC would represent a highly significant innovation in American money, and with it, a range of risks and benefits,” the Fed said.

The report solicits stakeholders to provide feedback by answering 22 questions beginning on page 25 of the document. 

Some of the benefits of a CBDC that were noted in the paper include a safe and convenient form of central bank money as well as fast and inexpensive overseas payments.

As for the risks, the Fed views a central digital currency could create problems maintaining the stability of the financial system and the objectives of monetary policy.

For now, 87 countries are exploring their own CBDCs, and 14, including major economies like China and South Korea, are already in the pilot stage. Nine have already fully launched them. Earlier this month, Fed Chairman Powell spoke  and apologized for the long delay in providing this report. He suggested other monetary challenges were being prioritized ahead of digital currencies causing the delay.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

Powell’s Apparent Shift on Digital Currency

Digital Currency Report from the Fed is Past Due

The First Cryptocurrency Exchange Hacked in 2022

Walmart’s Metaverse, NFT, and Crypto Plans

 

Sources

https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf

https://www.therams.com/news/rams-place-punters-corey-bojorquez-johnny-hekker-on-reserve-covid-19-list

 

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	Image Credit: Eric Steinhauer (Pexels)

The Federal Reserve Continues to Equivocate on Crypto

 

The Federal Reserve avoided taking a stance on whether the U.S. should establish a digital currency as legal tender in a report released Thursday (January 20).  It appears to avoid taking a solid position on crypto in general.  The long-awaited paper does, however provide insight into the agency’s thinking. It then stops short of expectations that the report may have established a timeline or roadmap for the U.S. to evolve its definition of money.

The 40-page paper that was promised to be delivered by late Summer 2021 begins with a discussion of existing forms of money, the current state of the U.S. payment system, and its relative strengths and challenges. It then provides information on the various digital assets that have emerged in recent years, including stablecoins and other cryptocurrencies. The paper then turns to central bank digital currencies (CBDC), focusing on its uses and functions; potential benefits and risks; and related policy considerations.

The Federal Reserve’s initial analysis suggests that a U.S. CBDC, if one were created,

would best serve the needs of the United States by being privacy-protected, intermediated, widely

transferable, and identity-verified. The paper expressly points out throughout that it is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC. The paper says its purpose is to foster conversation and public comment.  “The paper is not intended to advance any specific policy outcome, nor is it intended to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a U.S. CBDC,” the report read.

 

Source: Money and Payments: The U.S. Dollar in the Age of Digital Transformation, Federal Reserve

 

The Board of Governors of the Federal Reserve also indicated that it would not proceed with the issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific law authorizing the use. “The introduction of a CBDC would represent a highly significant innovation in American money, and with it, a range of risks and benefits,” the Fed said.

The report solicits stakeholders to provide feedback by answering 22 questions beginning on page 25 of the document. 

Some of the benefits of a CBDC that were noted in the paper include a safe and convenient form of central bank money as well as fast and inexpensive overseas payments.

As for the risks, the Fed views a central digital currency could create problems maintaining the stability of the financial system and the objectives of monetary policy.

For now, 87 countries are exploring their own CBDCs, and 14, including major economies like China and South Korea, are already in the pilot stage. Nine have already fully launched them. Earlier this month, Fed Chairman Powell spoke  and apologized for the long delay in providing this report. He suggested other monetary challenges were being prioritized ahead of digital currencies causing the delay.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

Powell’s Apparent Shift on Digital Currency

Digital Currency Report from the Fed is Past Due

The First Cryptocurrency Exchange Hacked in 2022

Walmart’s Metaverse, NFT, and Crypto Plans

 

Sources

https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf

https://www.therams.com/news/rams-place-punters-corey-bojorquez-johnny-hekker-on-reserve-covid-19-list

 

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	Image Credit: Darius Siwek 

This Process of Removing Greenhouse Gases Could Have Two Great Benefits

 

David L. Chandler | MIT News Office

 

Methane is a far more potent greenhouse gas than carbon dioxide, and it has a pronounced effect within first two decades of its presence in the atmosphere. In the recent international climate negotiations in Glasgow, abatement of methane emissions was identified as a major priority in attempts to curb global climate change quickly.

A team of researchers at MIT have come up with a promising approach to controlling methane emissions and removing it from the air, using an inexpensive and abundant type of clay called zeolite. The findings are described in the journal ACS Environment Au, in a paper by doctoral student Rebecca Brenneis, Associate Professor Desiree Plata, and two others.

Although many people associate atmospheric methane with drilling and fracking for oil and natural gas, those sources only account for about 18 percent of global methane emissions, Plata says. The vast majority of emitted methane comes from such sources as slash-and-burn agriculture, dairy farming, coal and ore mining, wetlands, and melting permafrost. “A lot of the methane that comes into the atmosphere is from distributed and diffuse sources, so we started to think about how you could take that out of the atmosphere,” she says.

The answer the researchers found was something dirt cheap — in fact, a special kind of “dirt,” or clay. They used zeolite clays, a material so inexpensive that it is currently used to make cat litter. Treating the zeolite with a small amount of copper, the team found, makes the material very effective at absorbing methane from the air, even at extremely low concentrations.

The system is simple in concept, though much work remains on the engineering details. In their lab tests, tiny particles of the copper-enhanced zeolite material, similar to cat litter, were packed into a reaction tube, which was then heated from the outside as the stream of gas, with methane levels ranging from just 2 parts per million up to 2 percent concentration, flowed through the tube. That range covers everything that might exist in the atmosphere, down to subflammable levels that cannot be burned or flared directly.

The process has several advantages over other approaches to removing methane from air, Plata says. Other methods tend to use expensive catalysts such as platinum or palladium, require high temperatures of at least 600 degrees Celsius, and tend to require complex cycling between methane-rich and oxygen-rich streams, making the devices both more complicated and more risky, as methane and oxygen are highly combustible on their own and in combination.

“The 600 degrees where they run these reactors makes it almost dangerous to be around the methane,” as well as the pure oxygen, Brenneis says. “They’re solving the problem by just creating a situation where there’s going to be an explosion.” Other engineering complications also arise from the high operating temperatures. Unsurprisingly, such systems have not found much use.

As for the new process, “I think we’re still surprised at how well it works,” says Plata, who is the Gilbert W. Winslow Associate Professor of Civil and Environmental Engineering. The process seems to have its peak effectiveness at about 300 degrees Celsius, which requires far less energy for heating than other methane capture processes. It also can work at concentrations of methane lower than other methods can address, even small fractions of 1 percent, which most methods cannot remove, and does so in air rather than pure oxygen, a major advantage for real-world deployment.

The method converts the methane into carbon dioxide. That might sound like a bad thing, given the worldwide efforts to combat carbon dioxide emissions. “A lot of people hear ‘carbon dioxide’ and they panic; they say ‘that’s bad,’” Plata says. But she points out that carbon dioxide is much less impactful in the atmosphere than methane, which is about 80 times stronger as a greenhouse gas over the first 20 years, and about 25 times stronger for the first century. This effect arises from that fact that methane turns into carbon dioxide naturally over time in the atmosphere. By accelerating that process, this method would drastically reduce the near-term climate impact, she says. And, even converting half of the atmosphere’s methane to carbon dioxide would increase levels of the latter by less than 1 part per million (about 0.2 percent of today’s atmospheric carbon dioxide) while saving about 16 percent of total radiative warming.

The ideal location for such systems, the team concluded, would be in places where there is a relatively concentrated source of methane, such as dairy barns and coal mines. These sources already tend to have powerful air-handling systems in place, since a buildup of methane can be a fire, health, and explosion hazard. To surmount the outstanding engineering details, the team has just been awarded a $2 million grant from the U.S. Department of Energy to continue to develop specific equipment for methane removal in these types of locations.

“The key advantage of mining air is that we move a lot of it,” she says. “You have to pull fresh air in to enable miners to breathe, and to reduce explosion risks from enriched methane pockets. So, the volumes of air that are moved in mines are enormous.” The concentration of methane is too low to ignite, but it’s in the catalysts’ sweet spot, she says.

Adapting the technology to specific sites should be relatively straightforward. The lab setup the team used in their tests consisted of  “only a few components, and the technology you would put in a cow barn could be pretty simple as well,” Plata says. However, large volumes of gas do not flow that easily through clay, so the next phase of the research will focus on ways of structuring the clay material in a multiscale, hierarchical configuration that will aid air flow.

“We need new technologies for oxidizing methane at concentrations below those used in flares and thermal oxidizers,” says Rob Jackson, a professor of earth systems science at Stanford University, who was not involved in this work. “There isn’t a cost-effective technology today for oxidizing methane at concentrations below about 2,000 parts per million.”

Jackson adds, “Many questions remain for scaling this and all similar work: How quickly will the catalyst foul under field conditions? Can we get the required temperatures closer to ambient conditions? How scalable will such technologies be when processing large volumes of air?”

One potential major advantage of the new system is that the chemical process involved releases heat. By catalytically oxidizing the methane, in effect the process is a flame-free form of combustion. If the methane concentration is above 0.5 percent, the heat released is greater than the heat used to get the process started, and this heat could be used to generate electricity.

The team’s calculations show that “at coal mines, you could potentially generate enough heat to generate electricity at the power plant scale, which is remarkable because it means that the device could pay for itself,” Plata says. “Most air-capture solutions cost a lot of money and would never be profitable. Our technology may one day be a counterexample.”

Using the new grant money, she says, “over the next 18 months we’re aiming to demonstrate a proof of concept that this can work in the field,” where conditions can be more challenging than in the lab. Ultimately, they hope to be able to make devices that would be compatible with existing air-handling systems and could simply be an extra component added in place. “The coal mining application is meant to be at a stage that you could hand to a commercial builder or user three years from now,” Plata says.

In addition to Plata and Brenneis, the team included Yale University PhD student Eric Johnson and former MIT postdoc Wenbo Shi. The work was supported by the Gerstner Philanthropies, Vanguard Charitable Trust, the Betty Moore Inventor Fellows Program, and MIT’s Research Support Committee.

 

Suggested Reading:

ESG Indicators and How Investors Use Them

The Extreme Growth of ESG Has Bumps that Include Greenwashing

Do Mandatory Holidays Mean Less Freedom and Flexibility for Workers?

Lessons from How the Back of Inflation Finally Broke in 1982

 

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	Image Credit: Nigam Machchhar, (Pexels)

Facts About the Fed Being Hawkish

 

In my reading last week, I came across a number of articles suggesting the US Federal Reserve (The Fed) has done a 180-degree turn to a more “hawkish” stance. This would mean that they have become inflation fighters.  As a reformed “bond guy” that participated in the Treasury’s first TIPS auction, I can’t help but mourn for the old bond market, the one that seemed to trade largely on inflation expectations rather than on kitchen sink monetary resolve. Below discusses why the Fed may actually be more “Dovish” than ever before in history with inflation above 4%. The ramifications of this have implications for the US Stock and Bond markets going into the New Year.

With year-over-year U.S. inflation running at 6.8% (CPI-U) and the Fed inflation projection for 2022 at 2.6% to 2.7%, one would expect 30-year Treasuries to be yielding higher than the annual inflation rate. Instead, it’s running 500 basis points (bp) below the pace, and 50 bp below the FOMC’s seemingly optimistic projections. Does the bond market know something that undermines the most basic tenets of interest rate movement? Or, is something else impacting bond prices?

Source: https://home.treasury.gov/

  

Background

During the early summer of 2020, in response to pandemic-related stress on the economy, the Fed introduced yield curve control as one of their tools. The way this seldom-used tool works is the Fed enters the open market and buys bonds across a large period of the yield curve in order to prevent rates from rising above a pre-set level. In this way, if market demand would tend to let rates rise, the Fed is there to bid prices up (keep rates down). If bond prices (yields) of targeted maturities remain above the pre-set level, the central bank does nothing. The Fed, in this way, provides unlimited demand should bonds trade-off.

Additionally, the Fed has been implementing quantitative easing (QE) since March 2020.  The result is the Fed now holds $5.64 trillion in Treasuries out of the $22.3 trillion available U.S. Treasury debt.

Along with Treasuries the Fed also holds $2.63 trillion in government-guaranteed Mortgage-Backed Securities (MBS). These securities, which are also backed by the full faith and credit of the US, trade at a small spread to similar duration Treasuries.  

When QE got underway last year, the Fed purchased roughly $110 billion a month in MBS: $40 billion a month in new money and $70 billion to replace principal pay downs. Unlike other market participants, the Fed does not trade these securities, they get put away until they pay off. Investors need not worry if the extremely large buyer may decide to sell one day. They won’t.

Out of the $5.64 trillion of Treasuries held by the Fed, only $326 billion mature within a year. The remaining $5.31 trillion impact longer rates, in fact, $1.02 trillion mature in 5-10 years, and $1.34 trillion mature in over 10 years. With over two trillion in debt securities pulled from the five years or longer end of the market, it now holds long-dated Treasury debt equivalent to 10% of U.S. GDP.

 

Is
Tapering Tightening?

While the Fed now regularly addresses inflation in its comments and intentionally avoids the word “transitory” when referring to it, there is very little economic brake tapping being done from a monetary policy level. Instead, it continues to suppress rates by buying bonds. While the Fed is not dropping as much money into the bond markets as they had been to control yields, they are still purchasing massive amounts. Each month they are tapering their purchases by $20 billion. But still, last month the Fed took down $120 billion in government-backed bonds – $80 billion in Treasury debt and $40 billion in mortgage-backed securities. These are now securities the market doesn’t have to absorb, which keeps rates down, but it is also stimulative as these securities were purchased on the open market.  

Bond purchases are monetary policy tools used to ease rates and stimulate the economy; they are a tool used to tighten. The purchases repress rates along the entire curve and serve to reduce borrowing costs spread to Treasuries that would include everything from mortgage borrowing to junk bonds.

Take-Away

If the Fed has become an inflation fighter and is now hawkish, the stock market, particularly companies that rely on borrowing, have a lot to be concerned about. Interest rates across the entire curve have been held down for a long time. By historical measures, interest rates should be paying inflation plus a premium for uncertainty. A rapid return to historical norms would be devastating for stocks. More directly, it would be devastating for bonds.

The Federal Reserve Act mandates that the Fed conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Allowing rates to seek their natural level any time soon would impact the markets, which is not mentioned as a mandate. However, “maximum employment” is one of the goals of monetary policy. Allowing the markets to sink would likely reduce employment greatly. With this, the Fed is likely to remain accommodative using all the tools necessary to maximize employment.

As long as rates are low, savers will need to search for ways to protect their money from inflation. This could keep the stock market on its upward trend.

  

Suggested Reading:

How Difficult Will it be for the Fed to Control Inflation?

Inflation Seems Persistent, What Now?

Yield Curve Control, Stock Prices, and Trust (June 2020)

The Fed is Clear that they Intend to Hold Rates Down

 

Sources:

https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details

https://www.bls.gov/opub/ted/2021/consumer-prices-up-6-8-percent-for-year-ended-november-2021.htm

https://www.usinflationcalculator.com/inflation/current-inflation-rates/

https://www.sifma.org/resources/research/us-treasury-securities-statistics/

https://www.statista.com/topics/6441/quantitative-easing-in-the-us/#:~:text=The%20Federal%20Reserve%20announced%20on,as%20quantitative%20easing%20(QE)

 

Stay up to date. Follow us:

	Image Credit: Nigam Machchhar, (Pexels)

Facts About the Fed Being Hawkish

 

In my reading last week, I came across a number of articles suggesting the US Federal Reserve (The Fed) has done a 180-degree turn to a more “hawkish” stance. This would mean that they have become inflation fighters.  As a reformed “bond guy” that participated in the Treasury’s first TIPS auction, I can’t help but mourn for the old bond market, the one that seemed to trade largely on inflation expectations rather than on kitchen sink monetary resolve. Below discusses why the Fed may actually be more “Dovish” than ever before in history with inflation above 4%. The ramifications of this have implications for the US Stock and Bond markets going into the New Year.

With year-over-year U.S. inflation running at 6.8% (CPI-U) and the Fed inflation projection for 2022 at 2.6% to 2.7%, one would expect 30-year Treasuries to be yielding higher than the annual inflation rate. Instead, it’s running 500 basis points (bp) below the pace, and 50 bp below the FOMC’s seemingly optimistic projections. Does the bond market know something that undermines the most basic tenets of interest rate movement? Or, is something else impacting bond prices?

Source: https://home.treasury.gov/

  

Background

During the early summer of 2020, in response to pandemic-related stress on the economy, the Fed introduced yield curve control as one of their tools. The way this seldom-used tool works is the Fed enters the open market and buys bonds across a large period of the yield curve in order to prevent rates from rising above a pre-set level. In this way, if market demand would tend to let rates rise, the Fed is there to bid prices up (keep rates down). If bond prices (yields) of targeted maturities remain above the pre-set level, the central bank does nothing. The Fed, in this way, provides unlimited demand should bonds trade-off.

Additionally, the Fed has been implementing quantitative easing (QE) since March 2020.  The result is the Fed now holds $5.64 trillion in Treasuries out of the $22.3 trillion available U.S. Treasury debt.

Along with Treasuries the Fed also holds $2.63 trillion in government-guaranteed Mortgage-Backed Securities (MBS). These securities, which are also backed by the full faith and credit of the US, trade at a small spread to similar duration Treasuries.  

When QE got underway last year, the Fed purchased roughly $110 billion a month in MBS: $40 billion a month in new money and $70 billion to replace principal pay downs. Unlike other market participants, the Fed does not trade these securities, they get put away until they pay off. Investors need not worry if the extremely large buyer may decide to sell one day. They won’t.

Out of the $5.64 trillion of Treasuries held by the Fed, only $326 billion mature within a year. The remaining $5.31 trillion impact longer rates, in fact, $1.02 trillion mature in 5-10 years, and $1.34 trillion mature in over 10 years. With over two trillion in debt securities pulled from the five years or longer end of the market, it now holds long-dated Treasury debt equivalent to 10% of U.S. GDP.

 

Is
Tapering Tightening?

While the Fed now regularly addresses inflation in its comments and intentionally avoids the word “transitory” when referring to it, there is very little economic brake tapping being done from a monetary policy level. Instead, it continues to suppress rates by buying bonds. While the Fed is not dropping as much money into the bond markets as they had been to control yields, they are still purchasing massive amounts. Each month they are tapering their purchases by $20 billion. But still, last month the Fed took down $120 billion in government-backed bonds – $80 billion in Treasury debt and $40 billion in mortgage-backed securities. These are now securities the market doesn’t have to absorb, which keeps rates down, but it is also stimulative as these securities were purchased on the open market.  

Bond purchases are monetary policy tools used to ease rates and stimulate the economy; they are a tool used to tighten. The purchases repress rates along the entire curve and serve to reduce borrowing costs spread to Treasuries that would include everything from mortgage borrowing to junk bonds.

Take-Away

If the Fed has become an inflation fighter and is now hawkish, the stock market, particularly companies that rely on borrowing, have a lot to be concerned about. Interest rates across the entire curve have been held down for a long time. By historical measures, interest rates should be paying inflation plus a premium for uncertainty. A rapid return to historical norms would be devastating for stocks. More directly, it would be devastating for bonds.

The Federal Reserve Act mandates that the Fed conduct monetary policy “so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Allowing rates to seek their natural level any time soon would impact the markets, which is not mentioned as a mandate. However, “maximum employment” is one of the goals of monetary policy. Allowing the markets to sink would likely reduce employment greatly. With this, the Fed is likely to remain accommodative using all the tools necessary to maximize employment.

As long as rates are low, savers will need to search for ways to protect their money from inflation. This could keep the stock market on its upward trend.

  

Suggested Reading:

How Difficult Will it be for the Fed to Control Inflation?

Inflation Seems Persistent, What Now?

Yield Curve Control, Stock Prices, and Trust (June 2020)

The Fed is Clear that they Intend to Hold Rates Down

 

Sources:

https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details

https://www.bls.gov/opub/ted/2021/consumer-prices-up-6-8-percent-for-year-ended-november-2021.htm

https://www.usinflationcalculator.com/inflation/current-inflation-rates/

https://www.sifma.org/resources/research/us-treasury-securities-statistics/

https://www.statista.com/topics/6441/quantitative-easing-in-the-us/#:~:text=The%20Federal%20Reserve%20announced%20on,as%20quantitative%20easing%20(QE)

 

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	Image Credit: Rafael Saldana (Flickr)

What is the Fed Taper? An Economist Explains How the Fed Withdraws Stimulus

 

Tapering refers to the Federal Reserve policy of unwinding the massive purchases of Treasury bonds and mortgage-backed securities it’s been making to shore up the economy during the pandemic. The unconventional monetary policy of buying assets is commonly known as quantitative easing. The Fed first adopted this policy during the 2008 financial crisis.

Normally, when a central bank wants to reduce the cost of borrowing for companies and consumers, it lowers its target short-term interest rate. But with its target rate at zero during the 2008 crisis – at the same time that there was no inflation and the economy was still hurting – the Fed was no longer able to cut rates further. And so the Fed turned to quantitative easing as a way to continue to reduce borrowing costs. When the government buys assets, their prices go up, which lowers their yield or interest rate.

The Fed again adopted this policy in March 2020 after the COVID-19 pandemic resulted in a national lockdown. By November 2021, the Fed had bought over US$4 trillion worth of Treasuries and other securities.

The U.S. central bank began tapering in November 2021, scaling back total purchases by $15 billion a month, from $120 billion to $105 billion. The Fed decided to double the pace at which it tapers on Dec. 15. Rather than $15 billion, the Fed will reduce purchases by $30 billion every month. At that pace it will no longer be purchasing new assets by early 2022.

 

Why it Matters

Growing concerns among economists that rising inflation could harm the economy are likely a big part of what led the Fed to begin tapering.

Inflation is the rate of change in the price of goods and services. The Consumer Price Index, which includes several categories of everyday items that a typical American might buy, is the measure of inflation most often reported in the media. In November 2021, it was up 6.8% from a year earlier.

By any measure, inflation is above the Fed’s target of 2%. By tapering asset purchases, the Fed may help reduce inflation – or at least slow its rise – because it is withdrawing some of the monetary stimulus that is fueling economic growth.

The reason the Fed has decided to accelerate the process is likely because it now believes inflation may be less transitory than it had hoped, at the same time that the labor market appears strong.

 

What this Means for You

Americans have enjoyed rock-bottom interest rates for the better part of the past 13 years, helping to make it cheaper to borrow money to buy cars and homes and start businesses.

Consumers and companies are already beginning to see slightly higher rates on mortgages, business loans and other types of borrowing.

In other words, the era of cheap money may finally be coming to an end. Enjoy it while it lasts.

 

This article was republished with permission from   The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of  Edouard Wemy Assistant Professor of Economics, Clark University

 

Suggested Reading:

Inflation Seems Persistent, What Now?

Deflation Not Inflation is Risk Says Cathie Wood

Investing in U.S. Maritime Infrastructure Spending

The Detrimental Impact of Fed Policy on Savers

 

 

 

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