To taper or not to taper is the question being asked on every trading desk and investor boardroom, as the answer to that question dictates which asset class and which stock one should be positioned in.
Going into Jackson Hole, the market was convinced the Fed would taper sooner than later given inflation metrics staying stubbornly high and most financial asset classes having recovered most of their losses for 2020. After all the pandemic induced lockdowns were over, so why the need for "emergency money"?
Over the summer months, especially in August, the market completely unwound its long cyclical, long reflation trade basket as any hints of tapering would mean a natural dollar rally and a selloff in commodities. The consensus reflation trade got a swift kick and unwound most of the gains made earlier this year as shorts began to cover their underweights in technology and sell down their exposure to commodities like iron ore, copper, and oil.
Today the market is very long the duration worried about tapering and the dollar rallying. That was the setup going into the non-farm payroll numbers being released today.
Fed Chair Powell made it very clear that there was still "significant progress" to be made as their main objective was employment which still showed about 10 million Americans without a job. The fact that there are more job openings than that is not being considered at all, why should they look for work when they are getting free checks? The Fed, while acknowledging that inflation is moving higher, is sticking with their "transient" view for now. Today the non-farm payrolls for August came in at a whopping low 235k jobs created, whereas the market was expecting a good 735k jobs created!
And there you have it, there is no rush to end the free money train for now. The goal post keeps getting pushed back further and the Fed is convinced that endless money printing has no negative consequences. They can be forgiven for thinking that as there have been none for the past 10 years, so why fix something that is not broken?
One thing the last few years has taught us is that the market moves are all about positioning. We have seen extreme moves and changes in cycles and sector rotations based on that going into key events. After Jackson Hole, Powell pretty much gave the green light to the reflation trade as it just meant that the tapering can was kicked further down the road, and rates rising was an even more remote possibility. If the market had a good payroll number for August, taper talk could have been a possibility going into the September FOMC meeting.
Given the disastrous print and slowing down of various economic indicators, the Fed has lost their chance to taper the balance sheet. It is incredible to think that after more than $4 trillion in free money printing, we cannot even sustain economic growth above 2.5% for more than six months. One wonders what happens the next time the repo market blows up or another exogenous shock were to take place Do we start printing $1 trillion QE per day, let alone a quarter?
It is debatable what QE really does to the real economy. It is a vicious cycle that in theory does lead to a recovery by pushing up housing prices and consumer's net worth, giving them the chance to spend more and boost the U.S. economy. The wealth inequality keeps getting wider and wider but the Fed keeps taking a bow as the market makes new highs. Paper currency will be just that, paper. For now, plan accordingly and invest wisely as there are only a few asset classes that will benefit from this over time, hard assets like physical gold and silver.
