November 28, 2022

Market Update

US Investors Love the US

Investors have put more than $86B into US equity mutual funds and ETFs this year, and on pace to be the second highest year since 2013 (last year’s record $156B). Of the $93B that was added to US or international equity funds, more than 90% has gone into ones owning US stocks. US stocks are nearly 1.8X as expensive as the other 22 developed markets in aggregate.

FOMC Minutes Released – 3 Key Ideas

The Fed should moderate the pace of interest rate increases due to the risk of overtightening. “Various” officials -- a descriptor not commonly used in the minutes -- had concluded that rates would ultimately peak at a higher level than previously expected. Finally, there is a 50% chance of recession.


  • "The staff continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline.”

Fed Hawkishness Peaks as Rising Debt Payments Erode Savings

At the middle of 2021, there was an estimated peak of $2.3T in excess savings. This was due to huge government transfers and collapsing demand (we didn’t spend). These excess savings have been a buffer to a recession, dampening the feedback loop. Now, excess savings are being run down due to inflation (higher prices and higher interest rates).


  • We can see the dissaving in the rapid decline in “excess disposable income” (disposable income above its pre-pandemic trend)
  • Excess savings are no longer bolstered by excess income, people are spending more, and pandemic-related transfer payments have ceased
  • Consumer and mortgage debt interest rates are rising
  • In nominal terms, households have to repay an estimated $1.75T each yr (almost 10% of disposable income)

Other Important Issues

Medicare spending is forecast to top $1T for the first time next year. Entitlement spending (Soc. Sec., Medicare, Medicaid, ACA subsidies) is expected to grow from $3T next year to $12.5T in 30 years.

The OECD says that the world’s central banks must keep raising rates to fight soaring and pervasive inflation, even as the global economy sinks into significant slowdown. Otherwise, we risk a wage-price spiral.

Bank of America's latest fund manager survey found that 92% believed we would see stagflation. Citigroup says that the “Powell Push” will occur – the Fed will be compelled to hike, even if growth plunges and BlackRock sees no prospect of a soft landing in the US or Europe.

One study, called “Fifty Shades of QE,” assessed the many research papers that measure the impact of QE on the economy. It found that all of the research coming from central banks view QE as a great success, but only half of the research from academics finds any benefits to economic output or inflation. When they do find benefit, it tends to be smaller than the bank research claims. There are clear problems with QE:

  • Now that interest rates have increased, the Fed must pay more for reserves than it’s getting from bonds in its portfolio.
  • QE distorts the risk-free rate (the basic building block of pricing risky assets)
  • Zombie companies are propped up with low rates.
  • We don’t know when the gov’t borrows too much.
  • QE blurs the relationship between fiscal and monetary policy.