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Kyle Bass Believes Fed Will Be Forced To Abandon Hiking Rates As Stocks Crash

Kyle Bass Believes Fed Will Be Forced To Abandon Hiking Rates As Stocks Crash

During an interview with CNBC Thursday afternoon, Hayman Capital…

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This article was originally published by Zero Hedge

Kyle Bass Believes Fed Will Be Forced To Abandon Hiking Rates As Stocks Crash

During an interview with CNBC Thursday afternoon, Hayman Capital founder Kyle Bass joined Jeffrey Gundlach and other astute observers of the market by postulating that the Fed won’t be able to succeed with its planned 4 interest-rate hikes by the end of the year.

“Gundlach said that the Fed could get to 1.5% on the Fed funds rate, which might happen in the next 12 to 18 months. But that would trigger a recession,” he said.

But by the time the Fed gets to the second hike, markets will tank, forcing the central bank to backtrack.

Speaking during his first CNBC interview of the year, Bass argued that there’s a “huge mismatch, I think, between policy and reality…when you look at the reality of hydrocarbon demand…the reality is that…we’ve been pulling CapEx out of the oil patch because we so desperately want to switch to alternative energy. The problem is you can’t just turn off hydrocarbons. It takes 40 or 50 years to switch fuel sources,” Bass explained.

And as the global economy shakes off the impact of the pandemic, Bass predicted that “the same forces that applied to bring oil below zero [

Kyle Bass agrees with Gundlach (and the market): “The Fed can’t raise rates more than a 100-125 bps before they have to stop”

— zerohedge (@zerohedge) January 13, 2022 “>back in April 2020] will apply on the upside. We will get the world reopened by the middle of the year…you can’t just flip on an oil well…the only people funding the oil patch are family offices.”

As demand for oil intensifies,  the dynamic will send prices on front-month contracts “well above” $100/barrel”, Bass projected.

“There are so few people out there funding CapEx…if we reopen, you’re going to see numbers that people aren’t ready for.”

Bass’s interlocutors then opted to switch gears with some questions about China. After Wilfred Frost gently accused Bass of being a China bear, Bass insisted that he considers himself a “China realist” before launching into a discussion of China’s real-estate market.

As many investors may have learned from all the reporting about Evergrande and other deeply indebted China developers in recent months, roughly one-third of China’s economy is driven by real estate.

The surge in prices has contributed to China’s demographic nightmare, Bass said. “…the average birth rate of women in China fell below 1.2…you had an aggressive population decline because men can’t afford to buy homes because they’re priced at 20x to 30x their annual income.”

This has become a problem for China’s leaders.

“Xi needs real estate prices down and he needs them to stay down,” Bass said.

As for those who are betting on a bounce in Chinese stocks, Bass characterized this as “a fool’s game.”

As for whether or not he’d ever invest in Chinese stocks again, Bass replied:

“Fool me once but you’re not going to fool me twice…I feel like people who are investing in Chinese equities are breaking their fiduciary duty to their investors.”

Circling back to a discussion about the Fed, Bass pointed to Goldman’s call for 4 hikes this year. When the Fed does deliver on the rate hikes it has led the market to expect, “the curve is going to flatten, the long end of the curve will invert and the Fed” will likely need to throw it in reverse.

“My personal view is they can’t raise short rates more than 100-125 basis points before they have to stop,” Bass said.

Once this happens, a recession in the US will likely follow.

“I think they’re going to have to back away from that plan once they start hiking…that’s my view.

With all this in mind, “there’s no way the stock market goes up this year and it probably goes down pretty aggressively,” Bass concluded.

And once the Fed starts hiking rates, this, compounded by surging oil prices “will compound people’s inflation problems.” And that is already very modestly bring priced in… March rate-hike odds are rising to cycle highs but the odds of 4 rate-hikes by year-end are sliding…

So, after more than a decade of easy money policies, 2022 is shaping up to be a difficult year for American consumers.

Tyler Durden
Thu, 01/13/2022 – 19:40





Author: Tyler Durden

Economics

Why the Stock Market Is Tanking, and What Investors Should Do Now

"Stay focused on where you might be a year from now rather where you might be a month from now."

This is a scary moment for stock market investors.

The S&P 500, a common benchmark used to measure how the stock market is doing overall, fell into correction territory Monday following its worst week since March 2020. (A market correction is a decline of between 10% and 20% from its most recent high.) The news comes after a rough start to the year for investors overall, with tech stocks and cryptocurrency suffering particularly bad price dips.

Swings in the stock market are hard to stomach, especially for investors who have gotten used to strong returns.

Here’s what experts say is going on with stocks right now — and what you should do about it.

Why is the stock market down?

There are several factors impacting the stock market right now, including the Omicron variant of COVID-19 slowing economic growth and recent disappointing earnings results.

But the most important factor impacting stocks is the notion that the Federal Reserve is going to raise interest rates and remove liquidity from the market, says Jack Ablin, chief investment officer and founding partner at Cresset Capital. (Liquidity refers to how easily assets can be bought and sold.)

The market was also long overdue for a correction, says Jim Paulsen, chief investment strategist at The Leuthold Group. And now that prices have started to fall, investors are fearful.

“The reason it’s trading like it’s trading at the moment is just purely emotions,” Paulsen adds. “You’re not going to be too worried about fundamental reports — like economic reports or earnings reports even — until this market just technically finds some stability for a few days.”

Investors are trying to “get out of the way” right now as markets fall, Paulsen says, driving the sell-off to continue. We’ve seen this before: In March of 2020, investors yanked $326 billion out of mutual funds and exchange-traded funds, which was more than triple the fund outflows seen in October 2008, the previous record, according to Morningstar.

“How low can this go? No one knows and until it shows some bounce and some stability for a period, I think emotions are going to be the primary thing that’s pushing the market,” Paulsen says.

What should investors do now?

So, should you panic? No, Paulsen says, adding that underlying fundamentals of the economy remain pretty solid.

“Stay focused on where you might be a year from now rather where you might be a month from now,” he adds.

But there may be ways to better position your portfolio right now. The willingness of the Fed to keep interest rates low for so long has led to a risk-taking environment where the most volatile assets often did the best, Ablin says. Yet as the liquidity profile starts to tighten and getting access to capital becomes incrementally more difficult for investors, it’s going to be the most speculative assets in the market that will feel the impact most.

So if you’re invested in highly speculative assets, it might be time to consider taking some of that risk off the table, Ablin says. Cryptocurrency is one example of these highly speculative assets, and their prices are plummeting lately.

This could also be a buying opportunity. There are areas of the market that are pretty favorably valued and should do fine even if liquidity is removed from the market, Ablin says. Those include international stocks and small-cap growth stocks, which really didn’t benefit from a lot of the central bank’s liquidity and didn’t rally with big tech stocks.

“Not only do they have more of a downside cushion but they may actually rise,” Ablin says.

Frank Panayotou, managing director, UBS Private Wealth Management, said via email his firm is positioning client portfolios to favor the winners from global growth, including energy and financials, and that the global healthcare sector provides an appealing mix of defensive and growth characteristics. (Defensive stocks tend to be more stable even when the overall stock market is volatile, and growth stocks are those expected to grow at a higher rate than the overall market.)

Overall, the key to weathering market storms like we’re seeing right now is to maintain a diversified portfolio — with a mix of large, small, domestic and international stocks as well as bonds, if that makes sense for you — and rebalance it regularly. (Rebalancing is when investors sell investments that have increased in value and replenish investments that have decreased in value to get their portfolio back to holding its target weights.)

You might also consider a safe hedge against inflation, by parking some of your money in Series I Savings Bonds (“I bonds” for short) or high-yield savings accounts, if you’re worried.


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Crypto Crash Alert: Why Are Crypto Prices Plunging Today?

Cryptocurrency bulls everywhere are hurting today as seemingly the entire asset class is in the midst of a brutal pullback. Indeed, 94 of the largest 100…

Cryptocurrency bulls everywhere are hurting today as seemingly the entire asset class is in the midst of a brutal pullback. Indeed, 94 of the largest 100 cryptos by market capitalization are down today as the crypto crash continues to make waves.

Source: Shutterstock

So, what’s behind this massive crypto crash?

Today’s drop is likely in response to uncertain market conditions, amplified by an upcoming Capitol Hill announcement. As per Bloomberg, President Joe Biden’s administration is preparing a piece of regulatory legislation for the largely unmonitored crypto markets. According to the article, “The late-stage draft of the executive order details economic, regulatory, and national security challenges posed by cryptocurrencies. … It would call for reports from various agencies due in the second half of 2022.”

This comes just days after officials from Russia’s central bank proposed banning the use and mining of cryptocurrencies, claiming it’s a threat to financial stability. The crypto horizon seems ripe with confusion, and rightfully so. Indeed, 2022 could prove a volatile year for the alternative asset as governments worldwide establish policies centered around the crypto phenomenon.

What else is bringing down cryptos lately?

Crypto Crash Reaches New Lows Amid Economic Confusion

Markets everywhere have been speculative ahead of impending interest rate hikes, made to combat record levels of inflation. As is historical precedence, fear of a downturn can often spur a market descent in its own right.

Ethereum (CCC:ETH-USD) is down more than 8% today, joining other popular coins like Cardano (CCC:ADA-USD), which is down 9%, and Solana (CCC:SOL-USD), which is down nearly 14%. Even meme-coin darlings like Dogecoin (CCC:DOGE-USD) couldn’t avoid the cold streak; DOGE is down 6%. Bitcoin (CCC:BTC-USD) and Ethereum, the top dogs of the crypto world, have lost more than 40% of their value since November as the entire crypto market shed more than $1 trillion.

To be fair, cryptos aren’t the only ones hurting. The S&P 500 is down nearly 3% today, on track to lose more than a 10th of its value this month alone.

2021 was a booming year across nearly all sectors and asset classes. Many cryptos saw their highest levels ever in Q4 of last year. However, heading further into the new year, the party may be over.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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5 Important Investing Lessons From Allakos’ Price Collapse

Allakos (NASDAQ:ALLK) is a clinical-stage biopharmaceutical company that recently saw a pretty dramatic price collapse at the end of December. I believe…

Allakos (NASDAQ:ALLK) is a clinical-stage biopharmaceutical company that recently saw a pretty dramatic price collapse at the end of December. I believe that ALLK stock, and its subsequent collapse, is a learning opportunity for the investing community.

Source: Pavel Kapysh/ Shutterstock.com

In mid-December 2021, shares of Allakos were trading near $83 per share and they tanked to a stock price of $7.43 at close on Jan. 19, 2022. At some point last year, ALLK stock reached a 52-week high of $157.98. Now the 52-week low stands at $6.38 which is around where ALLK stock currently sits.

So is that a good reason to invest in Allakos now?

I argue that it is a naïve and very dangerous investment decision. Luckily for the investment community, Allakos has given us plenty of food for thought regarding the all too many common mistakes novice or uneducated investors make when they decide to invest in stocks.

There are at least five stock market investing lessons that Allakos has reminded me of. Here are my thoughts on all these.

1. Investment Markets Are Not Casinos

When you go to a casino the expectations to win playing various games are slim to none. People just want to have fun, enjoy, have a cosmopolitan lifestyle for a bit, and wish to get lucky and make a profit. They generally have no plan at all. Wishful thinking is the reason for gambling.

Stocks should not be anything like this. There is a business plan behind each company: good, bad; successful, or terrible. ALLK stock has been alluring investors to gamble on a business plan that is too risky and without delivering any results yet. It’s a clinical-stage biopharmaceutical company with no revenue yet.

Is it any wonder the stock crashed off its 52-week high?

2. Invest in What You Know

Biopharmaceutical companies are inherently very risky, and clinical-stage biopharmaceuticals are multiple times riskier as they do not generate revenue.

I argue that investors in these cases of biotech stocks do not dig deep enough into the pipeline products and ignore the underlying fundamentals. Investing in a stock without knowing inside out the real product or services of the company, the latest news and key catalysts is like going sailing without checking the weather or even knowing how to swim. The investment markets can be like a very stormy sea that, at times, will make you feel uncomfortable, scared, and anxious.

It is not wise to sail without checking the weather first, then why buy stock in a company you know nothing about?

3. Volatility Is Your Best Friend and Your Worst Nightmare

Highly volatile stocks can quickly stir emotions. Just remember the hot meme stocks back in 2021. Biotech stocks are in general very volatile and can either deliver stunning profits too quickly that tend to deflate also very fast or deliver massive losses over time.

The good news is that investors can educate themselves to recognize patterns of abnormal returns. It is like gambling again, investors bet on clinical trial news.

The problem is that these clinical trials have a very asymmetrical path of delivering stock price movements. It is a zero-sum game. Toss a coin and invest in the outcome. The chances seem to be 50/50 to win or lose. Not bad.

However, this is not a recommended investment strategy at all. The reason is that investors cannot apply stop-loss limits effectively when things go bad. A 10%-15% stop-limit when buying a stock seems reasonable. With ALLK stock, the stock tanked from a closing price of $84.39 on Dec. 21, 201 to an open price of $10.58 on Dec. 22, 2021.

Any reasonable stop-loss would not have been triggered and investors would be left wondering why they lost approximately 90% overnight.

4. Realistic Expectations Often Seem Boring

I also argue that in most cases investors supporting biotech stocks have unrealistic expectations.

We know that inflation is too high and that the Federal Reserve will increase interest rates in 2022. This is a big reason why why the stock market is having a rough first month in 2022 as expectations have changed.

Biotech stocks are not all the same. There are reputable companies with solid fundamentals. There are questionable firms. And then there are companies like Allakos, with dreadful fundamentals.

Why would a company with zero revenue be expected to perform well?

What drives value for the investors?

The answer is the fifth reason below: strong fundamentals and attractive valuation.

5. Ignoring the Fundamentals Can Be Disastrous

At first glance, investors can discover two red flags for Allakos.

The company is unprofitable, has zero revenue and shareholders have been diluted in the past year, with total shares outstanding growing by 3.4%.

Analyzing the fundamentals of each public traded company puts the odds in your favor to make wise investment decisions. Not all your investment decisions will be a success, this is impossible, and there are no guarantees of outperforming the broader stock market. There is however a method, called due diligence that allows sorting great stocks from junk stocks. Finding a stock with great fundamentals is a start. Valuation is another story.

Allakos has a cash burn problem but has no debt yet on its balance sheet. Does this make it a company to invest in because it has a strong balance sheet? How does the company pay its operating and research and development expenses when it generates zero revenue?

Fundamental analysis may seem a tedious task at first to novice investors. The truth is that it is far easier than most think. The key concepts of analyzing financial ratios to evaluate stocks can be learned easily without any excuses. Valuation, however, is another story, but at least relative valuation can also be taught easily.

Bottom Line on ALLK Stock

Biotech stocks are a special category of investments that can easily turn from hot to cold in the blink of an eye.

If you study more of the fundamentals of stocks and stock trading then you can be more aware of the warning signs. And Allakos stock had severe warning signs foretelling of its collapse.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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