MAGGIE LAKE: Hello, welcome to the Real Vision Daily Briefing. It's Thursday, December 16th, 2021. I'm Maggie Lake. And here with me today is Liz Young, Head of Investments at SoFi. Hi, Liz. Welcome to Real Vision.
LIZ YOUNG: Hi, thank you for having me. I'm really excited to be here.
MAGGIE LAKE: Yeah, it's great to have you because we have a lot going on and particularly late in the session here in the US. If we take a quick look at the market action, it was an ugly looking day for tech. We see the NASDAQ down almost 400 points, about 2.55. Russell getting hit hard. The Dow was trying to stay in positive territory, really only thanks to financials, but were not really managing it right now.
VIX is up, bonds pretty steady, metals up and interestingly, crypto down, which we'll talk about a little bit later. But investors really taking stock of what was a really busy week on the central bank front. Today, Bank of England, ECB, they're also trying to digest really the spread of the Omicron virus variant. Samuel Burke has the latest from London.
SAMUEL BURKE: Maggie, the UK is facing the highest amount of COVID cases we've seen at any point in the pandemic and even though 70% of the population is fully vaccinated, England's chief medical officer says that a post-Christmas surge in hospitalizations is now inevitable. The government had already asked people to work from home, already put back a masked mandate, so people are wondering what type of restrictions we'll see next. Businesses are starting to feel the squeeze, restaurants and pubs had been hoping that Christmas parties would help the recovery from last year's lockdown.
Well, instead, they're facing a huge wave of cancellations. Check out this tweet from celebrity chef Tom Kerridge showing that in just one of his restaurants over the past six days, there have been 654 guests canceled their reservations. Now, the travel industry is already starting to feel the pinch as well. France has banned travelers from the UK from entering that country unless they have a compelling reason. And even visiting relatives is not on the list of those reasons.
This is all happening at the same time that prices continue to surge in the UK, inflation hitting a 10-year high of 5.1%. The Bank of England announcing Tuesday, they're raising interest rates from 0.1% to 0.25%. That makes them the first major central bank to raise interest rates in the pandemic, Maggie.
MAGGIE LAKE: And I'll just say that Mexico Central Bank also hiked rates while the ECB, the European Central Bank held steady but did say that it will begin exiting. Liz, what did you make of the selloff we saw on tech today?
LIZ YOUNG: Well, I think I would actually start with what happened yesterday after we had a rather hawkish pivot or at least confirmation of a hawkish pivot from the Federal Reserve. And then stocks rallied across the board and tech did really well yesterday, which was a curious reaction. I think actually, today tech selling off is a little bit more of a correction from what happened yesterday. I do think today's selloff was a little bit more dramatic than it should have been, I would have liked to see financials really hold the Dow up and hold the S&P up as well.
I do think that as we move through the end of the year, as we get into early 2022, and we start to get our arms around the idea that we're entering an environment where monetary tightening is going to take place, the market is going to have to figure out what does that mean, who can still carry the day? And it's going to be a little bit bumpy here for a while.
MAGGIE LAKE: Yeah, and I never liked when you start to see that selling intensify toward the end of the day, toward the close too. But we seem to be in a period where investors-- it's been an extraordinary year in some of these names. We are coming to the end of the year. We know people are looking to take stock of the profits they made maybe. Do you think seasonality is factoring into this? Because especially when you look at some of the individual stocks that are getting hit, for some of them, it's been a record run.
LIZ YOUNG: Yeah, so seasonality, let's talk about that just for a minute so all of the viewers are clear on what we mean by that. I think, first of all, seasonality, we talk about at the end of the year, sometimes as a Santa Claus Rally. You might look at this today and say, but things were down, where's the seasonality in that? There's also a force that happens at the end of each year.
It actually starts in September usually and then it goes through the end of the year, where people are doing things like tax loss harvesting, or just squaring up their tax position ahead of the following year. Also, if they expect there to be tax hikes coming especially in capital gains taxes, they might accelerate some of their gains into this year. That could certainly be happening. I think actually what's happening in a bigger way right now is that people have a ton of gains, as you pointed out, in a lot of these big tech names. I think most investors have been, and maybe still are overweight tech.
When they look into their portfolio and say, okay, I need to take some profit, which is a more positive way of framing selling, I need to take some profit in these names, they're going to sell the stuff that they have the biggest profit in first, and they're going to sell the easiest stuff to sell first, which usually is the biggest and most liquid names. You're seeing a lot of those really large tech names get hit today, which is going to drag the overall index down just by sheer weight and volume of what's happening in the market.
MAGGIE LAKE: Yeah, and I think over the years, I think people throw away around that word, "profit taking", but in this case, we all know, we were all looking at those 401s, or those retirement funds for those who own stocks and saying, yeah, it's the best year and maybe that's part of it, too, that psychology that things might get dicier next year it's going to be a little harder maybe to figure out what's going on.
It was a one-way trade for a lot of this year, and maybe people are getting a little bit more cautious about what they do. Part of that is the Fed and part of it, I think, is what's going on with COVID still, but let's talk about the Fed. There was this, I've laughed when I saw yesterday, everyone's like confidence in the Fed. All we've been doing is complaining that the Fed's got it wrong. They're behind the curve.
It was the worst mistake in the world to do transitory. And in one meeting, we decided that there was this great confidence in their ability to fight inflation. Do you think that people feel like the Fed is in control? Is the market getting it right? They're pricing in quite a few interest rate hikes for next year.
LIZ YOUNG: Yeah, so there's so much to say about this. First and foremost, what I would say is I do not envy Jerome Powell at all. I think he has a very, very difficult job. We hang on every word he says. We hang on the intonation he uses in those words. I make jokes all the time that he could be sitting at a dinner table and ask somebody to pass the salt and people would whisper, did you hear how he said that? What do you think of that?
It's ridiculous. And especially to your point that in one meeting, there was a statement that came out, he didn't even say anything that's surprising yesterday, he didn't say anything outrageous at all. He actually said exactly what the market had anticipated he was going to say, and suddenly the sentiment changed. What we want to watch-- first, I would say this, I am comfortable with them speeding up the tapering. I do think they were late on retiring the word transitory.
I also think they were maybe late on starting the tapering program so I'm having to speed it up now. We're trying to catch up a little bit. That's fine, though. I think speeding up tapering is going to have some effect on inflation fears. And it should hopefully have some effect on the yield curve come January when this speed up actually goes into effect. Now, the real question, though, is where the market is versus where the Fed thinks rates are going to be.
What you're seeing right now, actually, next year, through 2022, the market and the Fed are pretty close to in line. The median Fed expectation is that there's going to be three hikes in 2022, the market is right around there, too. That doesn't bode terribly for-- there's not going to be this huge surprise that would happen. I think the market is pretty in line with what the Fed is saying they're going to do. Beyond that, it starts to be a little bit more muddy. The Fed says they're going to keep hiking into 2023 and 2024, the market thinks they're not going to get anywhere above 1.5.
MAGGIE LAKE: And we know the tell, we know the tell.
LIZ YOUNG: Well, you can look at Fed Funds Rate expectations, the way that the market trades, Fed Funds Futures, and that's how you can surmise where the market thinks Fed Funds rates will be at certain points in the future. You look at that futures curve. One thing I would point out, though, and this is why I think it could change, I know that that's where the market is right now, I think the market will move if we actually do start hiking rates in sequential fashion.
Right now, the market says the Fed can't get above 1.5% in the Fed Funds Rate. That is no accident that the 10 Year Treasury is also trading at about 1.4%. Because kryptonite to the market is when the Fed hikes rates above where the 10 Year Treasury is trading. I don't think that that's anything surprising. I think as the 10 Year Treasury moves up in yield, you might see the market come to its senses and say, okay, maybe they have to hike rates a couple more times.
MAGGIE LAKE: Yeah, and a lot of this is going to depend on what happens to growth. There seems to be certainly people out there who think, sounds like a good plan, but they're not sure that growth is going to be robust enough to handle that, especially as you start to go out the interest rate hikes. What is your expectation for growth?
LIZ YOUNG: I think growth is going to be fine. I think the bigger fear is that the Fed slams on the brakes instead of taps the brakes. What would happen if they slammed on the brakes is that they would hurt growth, the economy would pull back. And we would actually stop the recovery from moving forward. And that's the fear that I think is still out there. And that's a lot of why I think the 10 Year Treasury yield is still so depressed.
Now, I also think that Jerome Powell and the Federal Reserve are going to do everything in their power to not slam on the brakes and to not completely thwart this recovery process. I think they've been clear about jobs still being an important piece. What I think might happen, though, in the first half of 2022, is that they're going to find out that the boxes that they keep saying need to be checked, get checked. And then they don't have anywhere else to go except to raise rates.
Then they have to do it very slowly, very methodically, and message very clearly what the expectations are. I'd also point out, even if they do raise rates three times next year, I think it feels very dramatic right now, because we've been so low for so long. But even if they did three times next year, the lower bound of that range is still below 1% and that is very low by historical numbers.
MAGGIE LAKE: Yeah, it's incredibly low. This was unthinkable at one point that we would be having this conversation where we have the Fed tightening, and we're still at those super depressed levels. One of the things that certainly-- by the way, we have a question from Bo and I think that was Powell too dovish? Is he too afraid of market response to take the most effective action?
I think what he's asking about is how worried are they? How bound are they to the asset markets? We know in the past when you've seen real volatility, and you start to see stock markets get incredibly nervous about what's going on, they're sensitive to that. Part of their mandate, but we know that they're sensitive to it.
LIZ YOUNG: Well, it's not part of their mandate, but they did start in the last couple years issuing that financial stability report. Although it hasn't become a part of their mandate, there's not a three-pronged mandate. They do certainly watch financial conditions. And they want to make sure that their policy is not upsetting financial conditions.
And they want to also make sure that the policy that's in place is allowing markets to function as they should, which is part of why they came in early in 2020 and started buying in the bond market, because the bond market just wasn't functioning properly. I do think they watch the market absolutely. I think one of the things, if we could give Jerome Powell what's on his Christmas list this year, I think he wants the yield curve to steepen.
And I would imagine that, and I actually wrote an article last week that said, all I want for Christmas is a steeper yield curve. But I would imagine that he's sitting there much like I am, and much like many other market participants are, scratching our heads and saying, why is it so flat? And why does it keep getting flatter? I think that's a part of the market that the Fed will watch very closely in 2022.
And if they can affect that, if they can make the curve steeper for the right reasons, meaning they send the signal that rate hikes are coming, and that the economy can withstand a rate hike, and that actually, it would help the economy move ahead, then you might see a really healthy situation, that would be a perfect sequence of events. You'd have growth that stayed moving forward slower than it was this year but moving forward.
You have corporations with strong pricing power. Yes, there's a rotation in the market and yes, the 10 Year yield would rise. But it's all happening in the face of a really strong economy and that's something that we can take, and I said this in my piece this week, if we can't take this now, when can we take this?
MAGGIE LAKE: And I think that's the worry. I think that's the worry out there that we're still-- all these years we moved from the financial crisis, still dealing with the fallout and still dealing with parts of the economy, parts of the markets that don't seem like they're robust on their own without intervention. Layered on top of the really tough job the central bankers have is the fact that we now have this variant, which is once again, we heard Samuel talking about it, the cases are quickly moving higher.
We know what's happening in the UK, but even here in the US, we have universities going all virtual again, we have Citigroup just a couple hours ago, in New York, telling New York staff, you know what, all virtual stay homework from home again. We really thought we were past this. Aside from it just being a total bummer for people. This is now this unknown, because you don't know what that's going to mean for the supply chain again. We know China as well, they shut down a whole city. You just get that, it draws out all the supply chain issues we've had which have muddied the water when you're trying to figure out what's happening with inflation.
LIZ YOUNG: Right, especially because that was the whole thesis around inflation being transitory. It was that once the supply chains get figured out, inflation will relax, we'll go back down to a more normal level. You're right. And I do think and I thought this early on in Omicron that if this variant took us to a place where we had to go back into some level of lower economic activity, it's going to increase inflation, not decrease inflation.
What we're looking at right now is, and I'm in New York City, there have been some cancellations. I've seen holiday parties get canceled. We're back to wearing masks in common areas. A lot of the stores are requiring it again, regardless of vaccination status. There certainly is a heightened level of scrutiny and a little bit of fear that's going on. I think in the United States, there is just not willingness or appetite to shut back down. And you could try, I don't even think people would obey it.
At this point, we are slowly learning to live with this. This is not the first variant, it will not be the last. We may go through periods where we have the jitters when something new presents itself. But I think that we are now out of that stop-start cycle. And we're just on start, although sometimes more cautious, but we're not going to stop again.
MAGGIE LAKE: Yeah, I completely agree with you. And I'm even surprised that there are work from home, but I think maybe because it's the end of the year, the holidays, that may be factoring into it when a lot of people are taking time off anyway, just trying to see if they can front run it, those who are making that decision. But yes, I think the issue more is what do they do elsewhere in the world.
We're all interconnected. We may not do that. But if there's a shutdown somewhere else, this is the thing with very sensitive supply chains, you're going to see an issue. We have a question from LP touching on a little bit, we talked about tax loss harvesting a moment ago, but they're bringing up, can we make a conclusion on the direction of the market considering that it's quadrupled expirations, FOMC week and tax loss harvesting going on?
There is a lot going on and expirations of futures contracts can be a little technical, but sometimes it can cause volatility in the market. Does it feel like it's a confluence of all these events? Should we not read too much on what's going on on any one given day?
LIZ YOUNG: We should never. Never read too much into any one given day and honestly even smaller than that, you should never even read too much into what the futures are doing before the market opens, it means nothing. You could see the futures down 200 points at 8:45am in a market that's up 400 by the end of the day, so you should never read too much into one single day.
Yes, you're absolutely right. There is a lot going on this week. And it was a lot of stuff