Breadth Thrusts & Bread Crusts: Changing Course in Choppy Waters

JC Parets
December 2, 2021

From the desk of Willie Delwiche.

There’s no shortage of headlines this week -- a potpourri of potentially market-moving developments. 

And boy, have markets moved! Of course, these market gyrations are probably not quite for the reasons the headline writers have proposed. But we can leave that discussion for another day...

Today, I want to talk about when to change course and when to sit tight. 

Let’s consider the recent comments from Fed Chair Powell on inflation and apply a lesson I learned when sailing on the waters of Lake Michigan.

The Federal Reserve generally -- specifically Chair Powell -- have stuck to the view that the uptick in inflation was transitory. And, as such, the movement toward tapering asset purchasing could be delayed and when finally undertaken, could be pursued gradually. That’s been the consensus view for most of 2021.

Some market participants agreed with this view. Others (myself included) were more skeptical. Time will tell who was right and who was wrong. But that’s not really the point of this conversation.

What’s important is the changes we’ve seen from the Fed this week. In comments before the Senate, Chair Powell changed course, adopting a view that inflationary pressures are expected to be more significant than previously expected. This suggests the Fed might have to pick up the pace at which it tapers asset purchases. 

Right now, Chair Powell is at the helm of a ship that’s recently found itself in rougher seas.

During the summer of 2020, my son and I went sailing on Lake Michigan about once a week with the Milwaukee Sea Scouts. 

It was a glorious escape during an otherwise trying period. Navigating our way one evening through a gap in the breakwater, the captain had us tack earlier than many were expecting. He explained how the boat is most vulnerable when coming about, and he wanted to minimize risk. 

This savvy captain was making the adjustment when we could, not when we were forced. 

Waiting too long could mean getting thrown off course at a dangerous time. It would increase the likelihood of ending up dead in the water and brushing up against the barriers. After all, the captain told us one of his cardinal sailing rules was that "we don't argue with concrete". 

As for Powell and the Fed’s pivot on inflation and the taper, navigating the turn was never going to be easy. But recent macro and market developments have made the task even more challenging. Powell has recognized the need to adjust the course, but his best window for change may have passed. The waters are getting choppy and obstacles are looming on starboard and port. It may take some luck to escape this turn relatively unscathed.

The risks of failing to act in a timely fashion are on full display this week. For all of us, having an eye on the waters ahead is a great way to manage risk and minimize the need to oversteer late in a turn. 

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