šTinker Taper
If you have any finance or news apps like the Wall Street Journal, New York Times, or Yahoo Finance on your phone, chances are youāve gotten a notification or two over the last few weeks about the Fedās desire to begin tapering. On Wednesday they made that decision official.
Who is the Fed? The Federal Reserve System or āthe Fedā is arguably the most powerful entity in the world.Ā Headed by Jerome Powell, they control interest rates in the United States and have influence over everything from the stock market to the mortgage rate of your new house.Ā Theyāre the most powerful entity you may never have heard of (like the time wizards or whatever Dr. Strange belongs to in the MCU).
As a result, I wouldnāt blame you if you cleared that notification and went on with your day as those two words ā āFedā and ātaperā ā may not mean a lot if you havenāt been following the story.
And thatās okay. Hereās why it matters.
Since March 2020, the Fed has been buying securities on the open market. Just like you would buy shares of a stock in your TD Ameritrade or Robinhood account, the Fed ā Americaās central bank ā has been making the same purchases of different kinds of bonds.
Except their purchases were just slightly larger: $120 billion per month, every month, since last year. Why are they doing that? What does that accomplish?
I canāt explain it to you like you are 5, but I will do my best to explain it through the eyes of a 21-year old.
Think of the US Economy as the most popular bar or club wherever you live. Thereās usually a line out front on the weekend, right? Letās call it Fed Barā¢, operated by Jerome Powell (known to his friends and associates as J-Pow).
Fed Barā¢ likes to keep a moderate line out front, a packed bar inside that stays packed throughout the night.Ā In terms of the economy, that means we want as many people working as possible and we want prices to remain reasonable.
Then COVID-19 shut everything down. No one was working so no one could afford to go out. Suddenly, Fed Barā¢ was completely empty. Sadly, this happened to many bars and restaurants in COVID.
The Fed manages the largest and most complex economy in the world (and human history?), so $1 tequila shots arenāt going to cut it. They needed a way to cut costs across the entire economy to encourage companies to hire and people to resume buying things. They do that by lowering interest rates, which means buying bonds.
Lower interest rates mean that companies can get loans to keep their businesses alive through the global pandemic. And, because no one in their right mind would lend to a cruise line when thereās a contagious disease floating around, the Fed also stepped in to act as the lender of last resort for many companies.
Flash forward a year and it worked! Trust me I just paid an obscene amount for a flight, travel is back. And if you went out for Halloween you can vouch that bars are back as well.
Now this means the economy is running hot and our hypothetical Fed Barā¢ is becoming too popular, so the Fed is faced with a problem.Ā The line is now way too long and is overcrowded inside which means no one is having a good time.
Whether you are fighting to get into a bar or purchase an airline ticket, the point is the same. Business is a boominā
Because of this, the Fed will raise prices to reduce the line while still running a profitable bar. In the real world, that means withdrawing support and purchasing fewer bonds to help these companies, also known as a taper.
Over the next several months they plan to slowly taper, and while doing so, see how the bar/economy reacts.
Obviously, this is oversimplified but the fact is the Fed spends a lot of time and effort trying to do exactly this with the economy.Ā They increase or decrease bond purchases to encourage, or discourage consumer spending.Ā Ā
Taper = The bar/economy is running too hot
Buying Bonds = The bar/economy needs some help
On its face, the Fed tapering is a good thing because it implies the economy has recovered. And, by many measures, it has. The unemployment rate is below 5% for the first time since COVID-19 hit the country, consumer demand is so robust that we canāt unload stuff fast enough at the ports, and the stock market is up double-digits this year. And we havenāt even gotten to the holiday shopping season yet!
The Fed has a delicate line to walk: turn off the stimulus too much too soon and risk economic calamity. Keep the stimulus going for too long and risk runaway inflation. The only tool to combat runaway inflation is higher interest rates, which, when raised aggressively, can cause economic contraction. Itās not a great spot to be in.
Whatās the Upside?
In our view, the announced modest taper may cause some pain in the stock market as companies adjust. Is that anything to worry about?
Not really. Most people reading this arenāt going to retire for decades, so some short-term stock market volatility is nothing to worry about. If stocks do fall, use this opportunity to buy stocks at a discount!
The only thing left to watch is our old friend, inflation. The taper is meant to cool off the economy and therefore inflation without causing a market shock. That is the tightrope the Fed is walking. Hereās hoping they find the right balance.
For Your Weekend
This is where weāll post a round-up of essays, podcasts, and streaming shows to check out over your weekend. We cast a wide net so you donāt have to.
Read
āFear and Loathing in Cryptolandā by Nick Maggiulli (Of Dollars and Data)
Last week FOMO in the world of crypto reached a new fever pitch. This time though it wasnāt for Bitcoin, but for Shiba Inu coin (SHIB), a dog-based cryptocurrency that is a parody of Dogecoin (a cryptocurrency started as a joke). SHIB surged over 200% in a week and is up over 850% over the last month and over 84,000,000% over the last year:
It may be the greatest time-adjusted investment return of all time.
āEternals Backlash Exposes a New Type of Problem for Marvelā by Dais Johnston (Inverse)
The headline hooked me in my interneting. Itās a thoughtful look at the tension between formerly-underdog comic book fans grappling with the fact that almost twenty years later, superheroes dominate pop culture, putting fans in an unfamiliar, and, in some cases, uncomfortable position. How do they act when theyāre now at the top of the pop-culture pyramid?
Watch:
Awkafina is Nora from Queens (HBO Max)
Fans of Silicon Valley will find it easy to hang out with Awkafina, her hilarious grandma, and her sadsack dad in this delightful sitcom. Awkafina - real name Nora Lum - plays a comedic version of herself trying to navigate life in her Queens neighborhood. She mines post-college Millennial life for comedic gold. While each episode is a little formulaic (and progress happens a little too easily), the series remains grounded in family and staying close to loved ones.
The subject matter and language in each episode may be too coarse for some viewers.