Fed Minutes & Charlie Munger Makes a Statement

There was a lot of action in markets during the first week of 2022. On Wednesday, January 5, the FOMC’s December meeting minutes revealed the central bank was preparing to reduce its balance sheet after liftoff from a zero percent Fed Funds rate, going from quantitative easing to tightening. The minutes pushed stocks and bonds lower, with the long bond futures falling to the lowest level since March 2021. 

Friday’s employment report shows an increase of 199,000 in non-farm payrolls, less than half the 422,000 new jobs the market had expected. Wages rose by 4.7% on a year-on-year basis, feeding inflationary trends. The weaker-than-expected labor report should not deter the Fed from tightening credit, especially because the unemployment rate fell below 4%.

Meanwhile, Charlie Munger may have liked Alibaba (BABA) in Q3, but it appears he loved it even more in Q4 as he doubled his position as the shares tanked.

Action speaks louder than words

• Short-term real US interest rates will be negative in 2022, which is inflationary.
• The Fed is squawking, but will they be hawking?
• The unknowns - COVID-19 variants, the supply chain, geopolitical issues, mid-term elections, and unforeseen factors.
• Each 25 basis point hike increases debt servicing by nearly $75 billion.
  
  

Monetary and fiscal policy - Partners going in opposite directions

• Fiscal policies remain inflationary as the spending continues.
• Monetary policy could be toothless unless it aligns with budgetary austerity.
• Even a reduced Build Back Better program would increase spending by over $1 trillion.
   

Energy policy continues to fuel inflation

• Hydrocarbons continue to power the US and the world.
• Crude oil was probing above $80 last week.
• Higher energy prices increase costs for businesses and individuals.
• US energy policy reduces supplies and makes the US and world more dependent on OPEC and Russia.
  
  

Value is in the eyes of the beholder

• Charlie Munger bought 165,000 BABA shares in Q1 2021. He increased the position by 83% in Q3 and added another 99% in Q4 as the stock dropped.
• Munger now holds over 600,000 BABA shares.
• BABA moved from $232.73 at the end of 2020 to $118.79 at the end of 2021, a 49% decline.
• The shares were at just under the $130 level at the end of last week.
• Munger sees value in the Chinese consumer technology company, but he is nursing losses as it accounts for 28% of his portfolio as of December 31, 2021.

Expect lots of market volatility over the coming weeks and months as many factors could cause a bumpy ride in stocks and markets across all asset classes in 2022.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!