Each new year, resolutions are a focus. But reflection on the previous year can produce more value. That’s why the first 2022 newsletter focuses on 2021 themes worth watching again.

Each one can help give you insight about how the markets could play out. Allowing you to not only protect your cash, but find ways to potentially generate returns.

Hope you enjoy it!

That quote is from Amarillo Slim Preston, a professional gambler. It comes across tongue in cheek, but the wisdom is enormous.

Before there were internet based multiplayer video games, or the metaverse everyone is drooling about. The financial markets were the world’s largest multiplayer game.

Everyone from PHDs to brick layers have tried to crack the market code. Yet the list of superior investors is short.

What if we told you focusing on the most influential player could help you draft your way to victory?

Dollars to donuts you would be all ears.

The US economy and financial markets are the largest games in town. And the Federal Reserve is the game host and largest stack holder. They influence all aspects of the market and will always do so. That’s why you track what they say and do.

If following the Federal Reserve is important for Stan - it should be important to you.

The Federal Reserve, in most circles, saved the global financial world from COVID-19. They used their unlimited chip stack (balance sheet) to buy assets when no one wanted them. Thus stopping the price plunge. From that point forward, the markets stabilized and rallied up until now.

So what does this all mean for 2022? A lot, dear readers!

The Federal Reserve has now stated that they are planning to reduce the size of their balance sheet in 2022. This news comes hot on the heels of the rapid inflation rise in the 2nd half of 2021, and the economy being on a solid footing. Given this, market participants have some to believe that the Fed may even raise rates in the coming quarters!

These moves will have a big impact on how the game will play moving forward, but how?

If the Federal Reserve is NOT buying assets any longer, then the largest buyer is out of the market. This allows financial markets to move toward “normal”. i.e. buyers and sellers drive asset prices.

In turn, interest rates on government backed securities should rise. And high flying stocks should pull back.

For example, the Dec 21 Federal Reserve meeting minute release suggested bond buying tapering and balance sheet runoff may come at a faster pace than expected. This pushed high flying tech stocks lower in price. See the chart of the Nasdaq below.

A sustained pullback in equity indices would be jarring for investors. Especially when they look at their 401k statements. The winners, however, will be conservative investors looking for steady fixed income interest payments.

As the Federal Reserve tightens loose monetary policy. Markets will return to focusing on things like earnings, cash flow and more concrete business metrics. Not on the fact that a company can borrow cheap money to fuel projected future growth.

Yes, the first half of 2022 could be a bumpy road for investors. But the sooner the markets get back to normal, the better we will all be.

The key to it all?

Be like Stan, focus on what the Federal Reserve is saying and doing.

For nitty gritty details of what the Federal Reserve bought during COVID-19 crisis, look here. We touch on how the “taper” will affect the market here.

Over the last 20 years, the Chinese government has tried to incorporate a capitalist free market economy inside of communist walls.

It has worked well over that time, allowing many disadvantaged people to move out of poverty to a middle class life. A positive for obvious reasons.

The tightly closed business walls also came down. Western companies and investors were allowed to participate in the growing economy. It appeared to be a win - win for the world. Then things suddenly changed last year.

It appears that as private companies and entrepreneurs became more wealthy. So did their influence. Their desire to be “free” from government control rattled inside leaders.

Soon government officials were installed inside private companies. Then government backed investment funds invested in fast growing private companies. It’s not hard to see how this could go wrong.

Fast forward to 2021, when the Chinese government no longer hid their actions.

One of the clearest examples of this was with Jack Ma (founder of Alibaba and Ant Group).

As Jack Ma’s wealth and status inside of China grew. The government decided they needed to reign his power in. His companies got hit with “antitrust penalties’ ‘, the largest IPO ever of the Ant Group was cancelled, and his Hupan University was dismantled.

Other entrepreneurs have also felt the heavy hand of the Chinese government. But Jack’s played out for the world to see.

The point of this example is to highlight how the positive investment thesis of pouring money into China may be over.

Look at the chart of US listed Alibaba - down an insane -65% in the last year! These are once in a generation moves in large cap stocks worth over $500B.

Or how about the most traded Chinese equity ETF - FXI - has performed versus the S&P 500:

What seemed like a great place for investors to grow long term wealth. Is now on shaky if not broken ground.

Just this week, bond king Jeffrey Gundlach said,

The current investment climate in China can, of course, change. But you need to think long and hard if you want to participate.

To see how bad it got for Jack Ma check out the piece by James Calhoun, titled “The Sad End of Jack Ma Inc.”

Back in July 2021 InterPrime posted a blog titled, “Stablecoins - Will Dollars Go Digital?”

The purpose of that piece was to highlight the potential growth of governments adding digital currencies to run side by side paper.

China is by far the fastest adopter of this currency medium. This week they expanded the trial for the digital yuan to increase citizen adoption (Source: CNBC). First mover advantage!

Other nations seem to be following along. The Bank of Jamaica recently completed their trial of a CBDC (Source: Yahoo). And other nations are also in the trial phase.

We don’t know what the benefits and/or negatives of a CBDC (Central Bank Digital Currency) will be. But it is something that needs to be watched.

The US Federal Reserve continues to drag their feet on the subject. But it remains a contested debate inside the government.

One should assume that the Federal Reserve will likely come to a conclusion about a trial in 2022. If they don’t, the dominance of the US financial system may start to weaken.

Each new year brings potential opportunities personally, professionally and financially.

By continuing to track the 2021 themes discussed above. You have the opportunity to put financial objectives within reach. In fact, you might even be able to outperform your 2022 financial goals.

Here’s to you getting all you want in 2022!

If you found this newsletter interesting and educational. Check out all the 2021 InterPrime newsletters here.

As always, we are happy to answer questions or discuss the markets. Shoot us an email.

Disclosure: InterPrime Advisors LLC may discuss and display, charts, graphs, formulas and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested.