The Investment Scientist

Archive for December 2021

I had a blessed 2021! Here are the highlights.

1) Finished all my Oxford courses.

2) Produced a Showstopper improvised musical show for my Oxford classmates at Oxford.

3) Visited the Balkans, especially “the Bridge over Drina.” Learned about its fascinating and tortured history.

4) Took my kids to many Western European cities/towns.

5) Continued my hip hop adventure with Doug. Now I can more or less rap freestyle!

6) Started learning German. With help of a fantastic teacher Kat, I can now speak broken German.

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In my last newsletter article, I explained what tapering means and how that would affect the market. At the end of the article, I opined that the Fed’s leisurely pace of turning off the money spigot may not be enough to turn the tide of inflation.

It now appears the Fed agrees with me. The latest announcement from the Fed has dropped the word “transitory”, signaling its recognition that inflation is here to stay. Not only that, but the Fed’s taper timetable has been expedited. The original plan was $15B less money “printed” every month, with July being the month that money printing will come to an end. The new timetable is to end money printing by March. After that, the Fed plans to raise interest rates three times.

The Fed is the banker for banks. When the Fed raises interest rates, banks have less incentive to lend out money since they could easily make a profit by just parking their money with the Fed. This is the traditional way of reducing the amount of money in circulation. 

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Recently, Fed Chairman Powell signaled that the Central bank will begin the process of “tapering”, and in fact may speed up the process given the recent inflation reports. What does that mean? How would that affect investors?

A little bit of background
Since the onset of the pandemic, the Fed has engaged in “unlimited” quantitative easing, a euphemism for money creation. The money base has ballooned from about $4T to $7T. (T here means trillions.) In other words, about $3T worth of new money was created. As of right now, this process has not stopped. Every month, another $120B is being created. (B here means billions.) 

Where did all that money go?
This torrent of money is rushing into all manners of markets: stocks, bonds, commodities, real estate, crypto, labor and even our daily groceries, making all prices go up, though to differing degrees and extents. As investors, we all benefit from the Fed’s action, however, as consumers, we will suffer, if we are not already.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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