by Ivan Martchev

December 21, 2021

The U.S. stock market is oversold and there are less than two weeks of trading until the end of 2021. If there will be a Santa Claus rally, it better start soon. Jerome Powell did not disappoint in his FOMC press conference last week as he admitted in his own soft-spoken way that he didn’t want to “rip off the band-aid” on the taper and stop buying Treasuries immediately, to avoid any dislocations in either stocks or bonds. He may not be as forgiving in 2022, as inflation will surely put pressure on the Fed Chairman.

Inflation readings were very low at the end of 2020, but the December 2021 CPI numbers, when reported in January, have a legitimate chance of being over 7% higher due to base effects and low numbers rolling off the calculation of the CPI index for the year-over-year comparison. Who thought we could see a 7% inflation increase with the Fed still buying bonds and holding the Fed funds rate at just 0-0.25%?

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The dollar is not waiting. It is appreciating on a trade-weighted basis – when looking at the Nominal Broad U.S. Dollar Index – and against the euro, which closed last Friday at $1.1236. I would not be surprised if by the time this monetary tightening is over the U.S. dollar and the euro are closer to parity.

The Broad Dollar Index is vastly superior to its cousin, the U.S. Dollar Index (DXY), as it includes a basket of major emerging market currencies that were at all-time highs at the onset of the pandemic in early 2020. We may be at all-time highs again if Powell manages to deliver on his monetary tightening.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In 2018, neither emerging market stocks nor currencies did very well, as Powell kept tightening monetary policy in earnest. I expect a similar situation in 2022. This year was not great for the MSCI Emerging Markets Index either, as in addition to the recurring COVID waves we had a regulatory assault in Chinese corporations that we hadn’t ever seen. Xi Jinping, trying to solidify his position as President for Life, decided that the Chinese tech sector was becoming too powerful and proceeded to rein it in. The coming delisting of the online cab competitor Didi (DIDI) from the NYSE, and its move to Hong Kong, plus the forced conversion of for-profit education companies to non-profits, like Tal Education (TAL), in effect destroying its business, are some of the many examples of the heavy hands of the Chinese government.

I think Xi is doing long-term damage to the Chinese economy and that his President for Life position is not nearly certain, particularly as his forced deleveraging campaign in the real estate sector is backfiring, and the 60 million empty apartments that are being held as “savings accounts” by the Chinese public no longer seem as safe as “money in the bank.” So, in addition to Powell’s monetary tightening, the ground is shaking in China’s real estate sector, giving 2022 the makings of a volatile year.

Turkey May Be the First Shoe to Drop

Insufficient foreign exchange reserves, chronic trade deficits due to crude oil imports, and inadequate monetary policy, have made the Turkish lira again an example of poor macroeconomic management in a country that otherwise has huge potential for economic development. Jerome Powell’s monetary tightening won’t help, as there is also an overhang of dollar-denominated borrowing going on in Turkey.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In 2018, the Turkish lira did not have a good year, but this time the situation appears to be spiraling out of control. In 2018 it was the Argentine peso that disintegrated, which in addition to Federal Reserve monetary tightening had the great misfortune of having a Peronist government replace the otherwise reformist Macri administration, killing any hopes of genuine reform in that country.

As long as President Erdogan is in power in Turkey, economic reforms are unlikely, and I am beginning to wonder , if the Turkish currency situation becomes significantly worse because of U.S. monetary tightening, will Erdogan follow Macri and be voted out of office? Currently, elections are scheduled for June 2023 in Turkey, and Erdogan’s party lost badly in the 2019 local elections. Since the situation now is even worse than in 2019, due to COVID, it doesn’t look good for the incumbent to cling to power.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
2022 Could Be “Like 2018 All Over Again”

Sector Spotlight by Jason Bodner
We’re Near “Oversold,” Ready for a Santa Claus Rally

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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