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Art Cashin sees inflation peaking soon and other surprises for the market in 2022

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Art Cashin from UBS deserves it.  He is a fan of playing with the crowd.

My annual “Cashin The Contrarian” interview with the NYSE floor legend was full of evidence. We met at our usual spot for the past 15 years:  Bobby Van’s steakhouse across from the Big Board in lower Manhattan.

Art, as he has a habit of doing, went against the consensus view on many subjects for 2022. These included Art’s belief that the Federal Reserve would be more aggressive next year in raising rates and on how long inflation might last.

Inflation rates aren’t as high, as everybody thinks.

 “The headline a year from now will be rates don’t rise as much as people assume,” Art tells me, suggesting that Fed Chair Jerome Powell and the others have not abandoned sensitivity to higher rates and the impact on the economy.

I would advise viewers to not pay too much attention to meetings or what was being said there. Keep in mind that Powell must be reconfirmed between the middle and end of January. They should not taper to fast, but if it’s deemed unwise by the market, they must allow for a “back-off”.

“And if the stock market experienced a dramatic drop, then I would expect the Fed to reverse its decision. The stock market is a key component of this economy, and I believe it. Assets have increased in people’s lives. Back to that consumer, their household assets have risen — some of that is measured by what the stock market does.”

The surprise on inflation:  Not what you think

Surprise!  Art believes inflation is transitory even though the Fed abandoned the concept. According to Art, many firms have ordered supplies in double quantities and supplies will pile up at the dock after the holidays. He thinks inflation will slow down in the first quarter of this year and points out some important dates in China.

“I expect product inflation to begin to decline sharply.” [in early 2022]. Two dates are worth keeping an eye out for, I’d suggest. The Lunar New Year and celebrations in Asia are the first. The Winter Olympics will be held in China, secondarily. China plays a crucial role in both the demand and supply cycles. Once President Xi has gotten past these two, he is worried about a shortage of food and energy. These are just a few of the other concerns he is worried about. The lunar new year should be their peak and then the start of the Winter Olympics. Then you’ll see the prices trend downwards, which I believe will make for a big headline. Many will ask, “Wait a minute! In December wasn’t the Fed suddenly falling transitory?”

It is likely that Covid will become a’manageable” disease

Art remains optimistic about Covid’s eventual impact and all its variants. Art believes that vaccines and antiviral medications will make significant progress against this disease by next year.

I think that the headline will read: “It appears somewhat manageable. Modifications and other variations will be a constant. It is believed that this accident occurred less frequently than if it was a design error by man. If that belief continues, it could cause problems as nations will be more cautious and will limit corporate travel. True, some people travel home to visit their family for holidays like Thanksgiving. It is still not the time for international travel. The bottom line is that it will impact the world’s economy unless things become more manageable. My hope is that there will be less vaccines, and more pills. If these things appear to work well then I think we will make Covid manageable — not unlike the vaccines prevented smallpox, but flu and a variety of other things — they’re managed more by therapy treatments.”

Consumers are the key to both stocks and economic success

Cashin is bullish on stocks, at least for the first half of the year, for one reason: the health of the consumer. 

Art thinks that 2021 will be a part of an actual consumer spending boom.

If Covid’s inflation rate is low enough that people are able to get out on their own, all the money can be spent. We had an economic boom because Americans have more savings than ever before in America, and that is why our economy was so strong. All of that money is available for spending. Covid could moderate, and you might have an unexpected economic boom where people start spending – much like the post-1942 baby boom. We may get the “roaring 20s” again, as people talk about.

The return of buybacks is a significant boost for stocks

Another reason Art is bullish:  record buybacks have returned.

Now that things are moving towards normalcy, corporate buybacks have returned to the same high levels they were prior to the outbreak. What caused this is not clear, but it’s been a huge boost for the stock market. We’ll continue to discuss this and also look at earnings and other issues if the trend continues. Corporate buybacks have played a major role in all the bull markets and rallies we have seen over the past four years. 

Tech valuations

Art is convinced that the megacap tech stocks of (Apple, Microsoft, Nvidia, etc.) Markets will remain a significant factor for the second half of the year, however, a revaluation is in order.

They’ve played a role, but I believe that this may be changing. We’ll need to seek out a wider economic spread. As we have seen over the last few years, I doubt that twenty or thirty companies will be able to inform us about what is happening in America and around the globe.

The threat of regulatory restrictions is another problem facing big-cap technology companies.

“Look at Facebook. Facebook gained so much power that Jack Ma had to change the name of it because it was anathema. It was controlling our kids’ lives and what they did. And suddenly, much like Jack Ma in China’s China, there were only a handful of people and corporations that appeared too powerful. You will definitely see this kind of social pressure returning and the government will have to challenge those large corporations’ influence. Although I would prefer they are challenged by the new innovators, it isn’t happening.

Earnings: Analysts underestimate 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 is convinced that it will repeat itself, at minimum for the first six month 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. For the next six month, corporate buybacks will place a bid below this market in a way that will shock many.

What could the earnings in 2022 be?  Right now, analyst estimate S&P 500 earnings will rise 10% next year. Cashin predicts that it will rise to “certainly 15″ and could even go up to 20 [percent higher].”

China: Are there problems brewing in China? 

 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. It’s not because I want to run for the election but my people have become upset. Their food is scarce, and they are having difficulties here. You have to do something. To get them to stop looking at it, you need to distract them. If you can’t feed you and give you the energy that you require, then I have to distract. This means that geopolitical surprise. You tell me what the consequences of the food shortage. I cannot give you an answer to that question. If you tell me the extent of the energy crisis, I’ll let you know. Then, tell me when to worry about Ukraine and Taiwan. It’s a time when autocratic rulers are trying to divert the attention of their people.”

Which is better: When to sell or when to buy? A Cashin parable

Art concluded our conversation with an illustration about the best time to sell and buy.  He was referring to Professor Jack, one of his mentors who trade over-the-counter stocks in silver during the 1960s.  Art Cashin, a very young boy, often met with Jack in one of the bars at 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. 

Professor Jack was still drinking at the bar, so he ran and informed him.

 “And he said to me, “Kid, sit down and buy me a drink.” It was tuition. My tuition was paid by Jack Scotch Old Fashioneds. The class lasted for as long I could buy them or Jack could talk after drinking.

 “I offered him a drink. He said to me, “Now sit down, and hear what I have to say.”  He said, “Now, sit down and listen to me.” I replied with “yes.” He replied, “Yes, when you hear missiles flying,”

 “And I said, ‘You buy them? They are not flying, so why would you purchase them?

 He said, “You buy them because if you’re wrong, the trade will never clear. All of us will be dead!”

He was my favorite man, and I told him that you won’t learn this in either the Wharton School nor the Stern School. The man I met in the bar just gave me a new insight into Wall Street. It will stay with me for a lifetime. You will soon discover that things don’t always look as they appear on the surface. Also, consider the consequences and the actions you must take.

Art’s wish for 2022:  “Let’s keep the missiles from flying.”

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