You need to hand it to UBS’ Artwork Cashin. He likes to play towards the gang.
“Cashin the Contrarian” was very a lot in proof in my annual look forward interview with the NYSE flooring legend. We met at our typical spot for the previous 15 years: Bobby Van’s steakhouse throughout from the Massive Board in decrease Manhattan.
As he’s wont to do, Artwork went towards consensus pondering on many matters for 2022, together with the concept that the Federal Reserve will turn into more and more aggressive elevating charges subsequent 12 months, and on simply how lengthy inflation will final.
Rates of interest: Not as excessive as everybody assumes?
“The headline 12 months from now might be charges do not rise as a lot as folks assume,” Artwork tells me, suggesting that Fed Chair Jerome Powell and the others haven’t deserted sensitivity to increased charges and the effect on the economic system.
“I’d recommend to the viewers, do not concentrate a lot on the conferences and what was mentioned at them. Keep in mind that Powell must be reconfirmed within the center to finish January. So in the event that they transfer to taper a little bit too quickly if one way or the other the market takes it badly, he is bought to permit for a back-off.”
“And if we had a sudden sharp drop within the inventory market, I feel you’d see the Fed again off. And I feel the actual fact is, this economic system relies upon way more on the inventory market. Folks’ property has risen. Again to that shopper, their family property has risen — a few of that’s measured by what the inventory market does.”
The shock on inflation: Not what you assume
Shock! The artwork says inflation will certainly show to be transitory simply when the Fed has given up on the phrase. He says many corporations have double-ordered on provides and that after the vacations provide will start to pile up on the dock. He believes inflation will start to abate within the first quarter and factors to some key dates in China.
“I feel product inflation will start to drop sharply [in early 2022]. I’d recommend to you that there are two dates that viewers ought to be careful for. One is the Lunar New Yr, okay, and its celebration in Asia. And secondarily, the Winter Olympics, are gonna happen in China. I feel China is a key perform within the demand cycle right here, within the provided cycle. And as soon as President Xi will get previous these two ones, he is frightened about a few meals scarcity, he is frightened about power shortages. He is frightened about all of these different issues. They need to crest on the lunar new 12 months and the start of the Winter Olympics. After which I feel you will notice costs start to develop down and that I feel might be a serious headline. Folks will say wait a minute, in December wasn’t the Fed immediately dropping transitory?”
Covid more likely to turn into a ‘manageable’ illness
Artwork is optimistic in regards to the final effect of Covid and its many variants. This time subsequent 12 months, he believes vaccines and antiviral tablets could have made important developments towards the illness.
“I feel the headline might be that it seems considerably manageable. We should look ahead to modifications and variations. There may be nonetheless some perception that this was much less of an accident and extra of an artificial design gone awry. And if that picks up that can current issues as a result of that can make nations way more defensive and it’ll limit issues like company journey and every time we take a look at the airways in the present day whereas we transfer the 12 months into this and home journey. Sure, persons are going house to see the household on Thanksgiving and whatnot. The worldwide journey has not come again but. So the marker is it’s going to have an effect on the worldwide economic system until it turns into way more manageable. I feel a large hope right here is much less vaccination and extra therapies, the tablets. If this stuff seems to work effectively then I feel we are going to make Covid manageable — not like the vaccines prevented smallpox, however flu and a wide range of different issues — they’re managed extra by remedy therapies.”
The important thing to shares and economic system: the buyer
Cashin is bullish on shares, not less than for the primary half of the 12 months, for one purpose: the well-being of the buyer.
Whereas many characterized 2021 as a part of enormous spending growth, Artwork believes the actual shopper spending growth will proceed into 2022.
“If Covid moderates to some extent the place folks can exit and about, then all of that cash is able to be spent. And that is why we had an economic system that was fairly good as a result of folks having financial savings in a better quantity than they’ve ever had in America earlier than, within the family. And that is accessible to be spent. So if Covid moderates, you can have a sudden financial growth when folks exit and begin to spend – virtually just like the post-World Warfare II child growth, they will exit and spend. Folks speak in regards to the roaring 20s – we could, in reality, get it once more.”
A serious increase to shares: the return of buybacks
One more reason Artwork is bullish: document buybacks have returned.
“Now that we’re transferring again towards virtual normalcy, imagine it or not company buybacks are again on the excessive degree they had been earlier than the outbreak now what induced that I am not totally positive, however, it has been a giant increase underneath the inventory market. And if it continues, we’ll, you understand, you and I’ll talk about it and take a look at earnings and different issues. However, company buybacks over the past 4 years have been a really, essential issue within the rallies and bull markets that we have seen.”
Artwork believes that mega-cap tech shares (Apple, Microsoft, Nvidia, etc.) will continue to be a major factor in the markets in the first half, but that a re-evaluation is coming.
“They’ve been a factor – I think that may begin to change and we’re going to have to look for a rather broader spread in the economy. I don’t really believe that 20 or 30 companies are going to tell us what’s happening in America or even in the world, as we’ve had over the past few years.”
Another problem for big-cap tech is more regulatory restraints are coming.
“Look at Facebook. Facebook became so powerful that he had to change its name because it appeared to be anathema. It was ruling our children’s lives, it was ruling what they were doing, and suddenly not unlike Jack Ma in China, there was suddenly one or two people, one or two corporations that looked too big. So I think you will see that kind of social pressure coming back and so the influence of those major corporations will be challenged governmentally and otherwise. I prefer that they be challenged by new inventors, but it’s not happening.”
Earnings: analysts underestimating strength
It was one of the big stories of 2021: analysts underestimated the strength of the economy and drastically underestimated earnings growth, by 10% or more. Cashin believes that is going to happen again, at least for the first six months of 2022.
“I think in the near term, the analysts once again are underestimating, and as I said to you earlier the thing that would be forgotten is that money that’s building up in the household, it’s been building up in the corporation. Corporate buybacks will put a bid under this market for the next six months, in a manner that will surprise many people.”
How much higher could earnings be in 2022? Right now, analysts estimate S&P 500 earnings will rise 10% next year. Cashin believes it will be “Certainly 15 and it could be 20 [percent higher].”
China: trouble brewing?
Art believes that China’s potential problems next year with food and energy may cause its leader, Xi Jinping, to take certain geopolitical risks.
“It’s because if I am the autocratic leader of a nation, and I begin to see the political polls. Not that I’m running for election, but my people are getting upset. They’re out of food, they’re having difficulty here. What do you do? You need to do something to get their attention away from it. If I can’t get you the food and get you the energy you need, I’ve got to distract you. And that means geopolitical surprise. So the reason that I can’t give you a solid answer as to what the relations will be, you tell me how bad the food shortage will be. You tell me how bad the energy shortage will be and I’ll tell you how far we go, when do we worry about Taiwan, or Ukraine? We’re in a period where autocratic rulers want to divert their people’s attention.”
When to buy and when to sell? A Cashin parable
As he often does, Art ended our discussion with a parable about when to buy, and when to sell. It involved one of his earliest mentors, Professor Jack, who traded over-the-counter silver stocks in the early 1960s. A very young Art Cashin often met with Professor Jack in the many bars around the NYSE.
This particular story centered around the very dark days of the Cuban Missile Crisis in late 1962, when it momentarily appeared as if nuclear war was about to break out between Russia and the U.S. A panicked, very young Art Cashin thought he was being smart by buying stock puts, a bet the market would drop.
He ran to the bar where Professor Jack was drinking and told him what he had done.
“And he said to me, “Kid, sit down and buy me a drink.” That was tuition for the school. I paid tuition by buying Jack Scotch Old Fashioneds and class lasted as long as I could afford to buy them, or as long as Jack could talk after drinking.”
“I offered him a drink. And he said, ‘Now, sit down and listen to me.’ And I said, ‘yes?’ And he said, ‘When you hear the missiles are flying, you buy them, you don’t sell them.’
“And I said, ‘You buy them? Why would you buy them if the missiles are flying?’
He said, “You buy them because if you’re wrong, the trade will never clear. We’ll all be dead!”
“I loved him, I said you don’t ever learn that in the Wharton School or the Stern School. This man in this bar has just given me an insight about Wall Street that will last me forever. That things are not often what they appeared to be on the face of it and think of the ultimate consequence and that’s the action you take.”
Art’s wish for 2022: “Let’s keep the missiles from flying.”