This is a special QuickHit Cage Match edition with returning guest Albert Marko, and joining us for the very first time Andreas Steno Larsen to talk about tapering. Will the Fed taper this year? If yes, when, how, and why? If no, why not? Also discussed are the housing market, China GDP, and corporate earnings.
Andreas is the chief global strategist at Nordea Bank, which is mostly a Nordic bank, but has a presence in large parts of Europe, but also in the US. He speaks on behalf of the bank on topics surrounding global markets and in particular bond markets.
Albert Marko is a consultant for financial firms and high net worth individuals trying to navigate Washington, DC and what the Fed and Congress are up to.
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This QuickHit episode was recorded on August 16, 2021.
The views and opinions expressed in this QuickHit Cage Match: Time to Taper? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.
TN: So Andreas, I noticed you guys, you and Albert kind of in a Twitter fight last week about tapering, and that’s what really drew me to this discussion. I wanted to give you guys a platform to talk through this. So help me understand, you know. So what is your position? Why do you think it’s going to happen? When do you think it’s going to happen?
ASL: Well, I think tapering is right around the corner, and the basic reason is that I expect marked sequential improvements in the labor market in the US over the coming two or three quarters. If you look at it, very simply speaking, right now, there are more job openings than unemployed in the US. I know I disagree with Albert on this as well. But in the old world, that would at least have let the Fed to turn very, very hawkish when they can see such a rate between job openings and unemployed as we have right now.
I basically have a case that once these extraordinary benefits, they will end across the US during September. Then we will have an explosion in a positive sense in the US Labor market. And that is exactly what is needed to convince the Fed of tapering.
So my base case is a decision taken in September and then an implementation starting already in December this year. And I expect them to be done already during the first half of next year with the tapering process. So it’s fairly aggressive compared to the scenarios I’ve seen painted by by other analysts.
TN: That’s really interesting. I just want to clarify one thing. When you say explosion the labor market, you mean more people coming into the market?
ASL: Yeah. And they come into the market and fill these job openings right now, we have a low labor market mobility due to a lot of temporary factors. And once they’re gone, then we should expect employment to be almost running at full speed before New Years.
TN: Okay. Okay. Very interesting. Albert, take it away. Help me understand what you’re thinking.
AM: Well, I mean, I would agree with him in the old days. Right. But we are in a situation where these tapering assumptions are based on Fed rhetoric and the public comments that they’ve been making specifically addressing his unemployment, unemployment boost or surge.
You know, we still have COVID lockdown patchwork across the world happening at the moment. Australia, Japan, Taiwan, and most importantly, China, because no one’s looking right now in China, but China’s GDP looks like it’s not going to surpass two or 3% for the next four or five quarters. With that in mind, where the United States going to get inventory for the holiday season and have this boost in employment surge that we usually get on holiday season.
It’s just, to me, there’s so many negatives, so many variables with negative connotations towards it. I can’t see the Fed tapering and just absolutely obliterating the market right before mid term season coming up in 2022. It’s just for me, it’s just inconceivable for them to do such a thing like that.
TN: Okay. Understood. So, Andreas, what do you think? Let’s say it doesn’t happen in September. What is the Fed thinking through and what mechanisms do they have to use, say, instead of a taper? Are there other things they can do aside from taper that will basically bring about the same intended outcome?
ASL: Well, I want to first of all, address what Albert said on China. I perfectly agree with the view on China right now. China is slowing massively. But I actually find it very interesting that the Federal Reserve is now even more behind the curve when it comes to its reaction function compared to earlier cycles, given that they want to see realized progress in labor markets and not forecasted progress.
And we know that labor markets, they lack the actual economic development. So it’s almost a given in my view, that we have a surge in employment over the coming couple of quarters as a consequence of what happened during the first half of the year. So that’s one thing.
And the second thing is that what we see right now in China is another wave of restrictions that will lead to renewed supply chains disruptions across the globe. And again, we will have a wave of supply side inflation, which is the exact kind of inflation that we are faced with right now. And given how the Fed communicated just three months back, you have to be amazed by how scared they are of the supply side inflation, even though it’s not the kind of inflation that they like.
So I still think that they will react to this, even though it’s supply side driven. What they have in sort of the toolbox ahead of September is obviously that they could hint that the interest rate path further out could be hiked. But otherwise, I think the most obvious tool is to look at the purchases of mortgages. Since we currently have a situation where most US consumers, they are very worried or even scared of buying a house. Timing wise right now, as a consequence of the rapid rise we’ve seen in the house prices. And I guess that’s directly linked to what the Fed is done on mortgages.
TN: Yeah. I can tell you just from my observation here in Texas where we have a lot of people moving in. House prices have taken a pause for probably the last two or three months where things even two, three months ago wouldn’t stay on the market for, like, three days. We’ve started to see things on the market for longer.
And so, I’m seeing what you’re saying, Andreas, about the housing market. And the question is, can that stuff pick up again, and is it justified? Albert, what’s your response to Andreas statement?
AM: The best comparison that we have is the 2013 economy to today’s economy. No one can sit there and argue that today’s economy is stronger than 2013. And look what Tapering Tantrum did to 2013 market. It was an absolute debacle. Yellen was so put off by Bernanke’s Tapering that she refused to do it in 2015. And in 2017, when they even mentioned it again, the market took a leg down. So, with that, right? And especially with Andres mentioning the word inflation, which is an absolute bad word to talk about in DC, tapering would have to have the Fed admit wrongdoing on sticking inflation.
When have we ever seen the US Federal Reserve ever take blame for something that’s negative in the markets? They just simply don’t do that. In fact, what I think they’re going to end up doing is allowing a market correction late into the fall and then unleash another $3 trillion of QE with Yellen and Powell to support the markets. So which would be completely opposite of tapering.
TN: Yeah, that’s interesting. You have completely opposite views. And what’s your view on the possibility of QE? I mean, is it possible?
ASL: Well, I don’t think Albert and I disagree a whole lot on the structural view or outlook, since that QE is a permanent instrument and it’s needed to fund the debt load of the US Treasury. There is no doubt about it. The point being here that the Federal Reserve needs a positive excuse to start tapering. I agree with that as well. And that exact positive excuse will be another couple of very strong labor market reports.
That’s exactly what they’ve been telling us. That they want to see between 800K and 1 million jobs created a month would be enough for them to launch a Tapering decision in September. Whether they will succeed with the entire tapering process is whole different question, but I’m looking for that decision in September. And then I guess Albert and I will agree a lot on the market takeaways if they take such a decision.
AM: Let me ask you a question Andreas. What would happen if the United States Congress refuses to deal with the debt ceiling and have no fiscal at that point? What would happen then?
ASL: Well, in such case, there is a whole lot of issues that you need to take care of as a Fed Reserve. So first of all, I’m not too scared of that scenario. I consider very low probability. I’m interested if you have another opinion.
AM: I personally don’t think it happens until at the very earliest November.
ASL: Yeah, but, I mean, obviously, every time there’s a debt ceiling deadline, we know that the true deadline is not the suspension deadline, its the deadline when the US Treasury is not able to run on fuels any longer, right? And that would be sometime during late October, there about I agree with you on that. So we basically have a window right now without a whole lot of issuance due to the debt ceiling being in place. And I actually think that’s a decent window for the Federal Reserve to utilize if they want to start tapering, since there is a smaller issuance for the private sector to swallow in such case.
TN: Interesting. Okay. What are you guys seeing on the corporate side? Are you seeing strength on the corporate side? I know we just had earnings season and they were very strong, but are you seeing a justifiably strong corporate position to start to taper?
AM: Right now, I really don’t. I mean, the University of Michigan Consumer Confidence had collapse. I think today, New York’s Manufacturer Index came in at 18.3, which was an astounding collapses in itself. You know, I personally deal with a couple of hedge funds, and they have been well behind the curve in returns right now.
I think the best ones are sub 10% for the year, so they’re gonna have to move back into cyclicals, and they’re gonna have to move back into small caps to make up the difference before the year end. Simply just even discussing that option, it makes tapering, you know, even less of a likely outcome just because it would ruin the market.
ASL: Obviously, if you go long small caps right now into a tapering scenario, you will end up losing. I agree with that. That would be kind of the worst. Yeah, exactly. But otherwise, I have to agree that the corporate sector is more doubtful, I would say, than the US Treasury in terms of a tapering decision. I’m much more scared of the corporate debt load than I am of the US Treasury debt load.
The State’s currency issue is they can always get rid of such a scenario. But the corporate sector is bigger trouble than the US Treasury into this scenario that I depict.
AM: Yeah. I completely agree with that one.
TN: Wow. We end on agreement. Guys. Thank you so much for this. Thanks so much for your time. I really look forward to it. Andreas, I look forward to having you back. Albert, of course, we look forward to having you back. Have a great week ahead, guys. Thank you very much.
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