The Policymaker Conundrum (Oct. '21 Chartbook, Part II)

Below is the second part of Delphi’s October Chartbook focused on important macro developments our team is tracking.

The Forest vs. The Trees

There’s a ton of interest and debate over whether we’re returning to a reflationary environment or one plagued by stagflation. How fast will the Fed taper asset purchases after its announcement this week? And more importantly, when will they decide to hike rates and how quickly will we flip from a dovish regime to a more hawkish one?

These are the types of questions that are top of mind for every investor right now, and I understand why. We’re finally starting to see a real shift in policy after 18 months of “money printer go brrr” memes, and that’s significant, at least in the short run. But we mustn’t lose sight of the bigger picture; we can’t lose sight of the forest for the trees.

The key thesis that underpins our big picture outlook is simple: we cannot afford for asset prices to collapse. Now, when I say we, I mean all of us, because the negative reflexivity of such an event would have major ripple effects across the real economy too. We’ve noted before how years and years of dovish policy and low interest rates pushed average investors and savers further out the risk curve, increasing vulnerabilities to market shocks.

And herein lies the Fed’s biggest challenge: how do you take the foot off the gas without risking a regression in economic conditions and markets? The Fed is behind the wheel of a Mack truck trying to drive it up an ever-steepening hill; if it takes its foot off the gas, sure the truck will continue gliding, but only until gravity catches up with it and pulls it back down