Kass: What Fed Chair Powell Is Selling, I’m Not Buying

I see monetary policy on a collision course, one that will likely exacerbate wealth and income inequality.

Clearly, the Fed is off the rails. Despite the consensus’ bullish response to Powell’s recent comments, both ‘stonks’ and ‘bonks’ could take a hit.  

With value stocks extended and growth stocks vulnerable to a higher cost of capital, I remain negative on the market outlook.

Dougie Kass @DougKass

‘Group Stink ‘personified: Every single FIN TV commentator, strategist and money manager pronounced Powell’s dovish comments as bullish for equities yesterday afternoon. They were not necessarily bullish either for stocks or bonds. We added to shorts. @realmoney

We stand at a monetary crossroads as we continue to double down and embark on monetary policy that is detrimental to society and to our financial markets.

Back in 2012 when Fed Chairman Bernanke demonstrated that he was out of touch when he was asked about current inflation during a Senate hearing, his forgettable and insensitive response was that his “wife does all the shopping.”

On Wednesday, current Fed Chair Powell, like former Fed Chair Bernanke, exhibited that he is out of touch and that he lives in a bubble that he has helped to create.

In case you left early, here is what I tweeted late Wednesday afternoon in response to Jim Cramer’s tweet:

Mar 17, 2021 ‘ 05:18 PM EDT DOUG KASS

I Don’t Agree With Cramer on This One

Respectfully disagreeHelping the underclass by wanting higher inflation, making homeownership completely unaffordable, presiding over a decline in the US dollar, discouraging savings with 0 interest rates and making retirement impossible without taking major risk in the markets? https://t.co/1joUjdNkfP

– Dougie Kass (@DougKass) March 17, 2021

Market Gurus Respond to the Fed And My Tweet

If you don’t believe me consider the following responses that I received (via email) from several of the very top hedge fund managers extant (I do not have permission to mention their names). I know, from his past writings that Jim is most respectful of the investment achievements of the individuals who have responded below:

“Powell only started talking about the poor and minorities when it was obvious Biden would be President. He is just trying to keep his job. I guarantee you he will now start to burnish his GREEN credentials. Ironically, the worst thing for the poor is a boom/bust cycle. Focusing on only the boom is quite myopic. In awe of Cramer’s day to day output but strongly disagree. In 20 years Powell will have a terrible legacy.”

“This is insane. Fed policies help the top decile…everyone else suffers. It’s not even close.”

More On Bullish “Group Stink”

The emerging conventional view, expressed by my friends at Miller Tabak is that Wednesday’s Fed comments are market friendly:

“Most analysis is understating just how dovish the FOMC’s new economic projections are. Since its December meeting, there have been three reasons to boost the economic outlook: 1) better then expected data (this week excepted, more on this later), 2) better than expected news on the efficacy and distribution of vaccines, and 3) much larger ($1.9 trillion) than expected fiscal stimulus. The stimulus is especially important because if the Fed had any doubts about its dovish posture, it is exactly the kind of outside event that the Fed could use to justify a re-positioning. Instead, the Fed reiterated an extremely accommodative policy stance. The FOMC’s growth forecast exceeded our expectations. Upping 2021 growth from 4.2% all the way to 6.5% puts the economy almost all the way back to potential output. The Fed also predicts that the coming inflation spike will take overall 2021 PCE inflation to 2.4%, and it shifted its assessment of inflation risks as being weighted to the upside. Despite this massive improvement in the economic outlook, however, the number of FOMC members predicting a 2022 rate hike only increased from one to four (out of 17), and the number predicting a rate hike in 2023 only increased from five to seven. Many observers doubt the Fed’s projections. We do that a rate hike in 2023 is more likely than not. In the shorter-term, however, the Fed is not going to react to the spike in inflation data coming in the spring and summer. Powell explicitly stated that it “would not meet the standard” for changing the Fed’s policy. Our stance remains that the inflation scare is mostly illusionary but will get much worse before it abates. This will continue to create significant upside for cryptocurrencies and other assets that benefit from inflation risk.”

Evercore chimes in similarly in “Max Dovish Fed Means Higher Yields, Not Lower Markets”:

“The FOMC was dovish and chair Powell hammered home they are willing to let inflation overshoot (no hikes with a 3.5% urate and 2.1% core PCE). With demand growth set to improve significantly and the Fed almost max dovish, yield curves will steepen and 10yr yields are biased higher. UST yields did not immediately react (dovish commentary sometimes anchors yields on the day), but they are now with the 10yr yields print at 1.73. As UST yields “catch up” to inflation expectations our bias remains the same; market returns slow, Cyclicals outperform Defensives, big cap tech outperforms spec tech, and Value still has short term tailwinds relative to Growth (this should fade in the coming months).

We do not see significant downside market risk if yields move to 2%. If the implied equity risk premium (ERP) stays around its current level (4.5%), than a 2% 10yr yields implies -1.5% downside from current levels given consensus EPS estimates and cash return assumptions. If the implied ERP declines to 4%, S&P fair value is 11% above its current level. The big question is if 4.5% should be the low end of the range on the implied ERP. If you benchmark the implied ERP relative to post GFC period, today’s ERP is low and the equities would have an increasingly negative skew as 10yr yields increase.”

Post Script: Late Wednesday evening, Jim “El Capitan” Cramer expanded on his positive view of Chairman Powell, here.

(This commentary originally appeared on Real Money Pro on March 18. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass’s Daily Diary and columns from Paul Price, Bret Jensen and others.)

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