What are the assumptions you use to frame your plans for 2022?
Last year I asked the same question heading into 2021. That was a tough year since we had just come off 2020 with Covid turning the world upside down. Of course, any assumptions about 2020 in 2019 were blown out of the water. But here is what I said in January of 2021 looking ahead with the actual result:
- GDP/Growth: USA likely to reach 3-4% annually by end of year. Pent-up demand with a COVID-free demand-driven economy will start to surge in Q3.
Turns out that Q4 2021 annualized GDP growth was closer t0 7% – see Booming U.S. Economy Ripples World-Wide. Q3 was nearer 2% (as reported on original version of this blog. In Q2 it was around 6.7% and Q1 it was a little over 5%. So my estimate of between 3-4% looks a little low but I had the right idea.
- Interest rates: USA likely to remain flat for 1H and may start to nudge up in 2H. Year-end target:
- 30-year fixed mortgage: 5-6% (currently around 3.0%)
- 10-year treasury note rate: 2.5-3.5% (currently around 1.0%)
Turns out that right now 30 year mortgage rates are hovering under 3%. Same with 10-year treasury note – they are still under 2% by quite a way. I over estimated when interest rates were going to go up. However, as you will see in my narrative below, it seems the Fed might be late in raising rates.
- Inflation: USA likely to pushing through 3-4% by Q4 but could well exceed this as labor/wages cost, increased regulation and interest rates nudge up and flow through; supply chain.
This is where I am on safer ground. Annualized inflation in US in November hit 6.8%. I underestimated yet my assumptions last year for why inflation was going to rise faster than the popular press proved to be spot on. So if I had been running the Fed, interest and mortgage rates would be a tad higher, sooner, in order to help control the inflation rate. But thankfully, you might think correctly, I am not paid that much.
So what is my narrative today looking at the end of 2021 and thoughts for 2022? Let’s start by looking at the Fed’s last public material from Fed Officials Project Three Interest Rate Rises in 2022 and Accelerate Stimulus Wind-Down. The Fed’s forecast is for:
- Core Inflation 2021 at 4.4%
- Dropping to 2.7% in 2022
The Fed has also signaled it wants to end the bond buying part of Quantitative Easing by March, thus opening the door to interest rates rises. This does not mean that easy money has ended by March; it just means it has slowed to zero. Since the Fed’s balance sheet has ballooned to over $8 trillion dollars, easy money (money supply M2) is still here, and very much alive; it has not ended or contracted yet. Its growth may have stopped by March, that’s all.
The Fed is forecasting three 0.25% rate rises during 2022. So even if we get to the end of 2022 we will still have a very unbalanced economy, large money supply and still very low rates. This does not quite line up for me – but bottom line the Fed is trying its best to signal that it is not panicking and it thinks everything is under control.
Every day more parts of the US economy reports price rise due to a new shortage from another part of the economy. Todays headlines suggest that a raw material that goes into fertilizer is short and so farmers are changing behavior (and raising prices) regarding planting and growing. When you read ‘supply chain’ in the press you should realize that this is not some remote, specialized thing only a few folks operate . The ‘supply chain’ is not the trucking business. It is everything, from raw materials to consumer goods to insurance to healthcare. Everything is connected and so we should not limit our thinking to logistics problems but a totally unbalanced economy. The Fed has completely distorted the investment markets with its bond buying and now our entire economy is going through a new phase of dislocation.
Remember when a storm shuts down the eastern corridor, and plans are grounded? It usually takes days, sometimes a week or two, for airlines to re-sort their crews, planes and other dislocated assets. We are doing the same thing with the US economy, only the storm has not yet abated. And in this case the storm is part Covid and part self-made.
So here are my assumptions for year-end 2022. I will assume inflation will run hotter than the Fed thinks it will, but I will taper my forecasts for interest rates since I will assume the Fed will try to avoid panicking the market.
- GDP/Growth: USA to reach 5+% annually by end of year. Roaring growth; re-jiggered supply chains; China investing in more growth will keep demand plodding along.
- Interest rates: USA will need to ramp up faster than currently signaled by the Fed. Note the Bank of England raised its rates today. Year-end target:
- 30-year fixed mortgage: 5-6% (currently under 3.0%)
- 10-year treasury note rate: 3-4% (currently around 1.0%)
- Inflation: USA likely to peak middle of the year at an annualized 8-9% but then slowing in Q4. For the year-end I would look for a 6% number.
These are my middle-to-upper limit with no disaster. With a Fed “mistake” accepted, this could get much higher, or more unbalanced. I don’t see or hear price rises abating and I can’t see how the Fed can dump its balance sheet before the next economic cycle is complete.
I think the watch-word for planning for 2022 should be scenario planning. There are some extreme possibilities in 2022 and it might be smart to explore the boundaries. Such practices can help you prepare plans to execute should certain things get triggered. This might stave off panic and help mitigate risks. Last year my thought was to develop a Plan B. I think for 2022 we might need a Plan B and a Plan C. Gartner has a whole body of work dedicated to scenarios and scenario planning. For me, the value is not really in a perfect plan. There probably isn’t such a thing. But the real value comes from the process of exploring the edges of the scenarios. As Toto Wolff once said, “Strategy is learning by doing“.