Picture: Microsoft

By Michael O’Neill

The importance of this year’s Kansas City Fed Jackson Hole Symposium has been elevated to something akin to the PGA Master’s Tournament.  And there isn’t any golf or attendees for that matter.

The annual boondoggle has been downgraded to a virtual affair, due to elevated COVID-19 health risks. 

Instead, the virtual format means bankers in pajamas will be sitting in home offices listening to speeches and participating in discussions around the central theme of “Macroeconomic Policy in an Uneven Economy.”

It’s like a burger without the patty, all calories no protein.

Downgrading the Symposium format likely lowers the risk of a market-moving announcement.  Some analysts believe Fed Chair Jerome Powell will use the Jackson Hole platform to announce a tapering plan to reduce monetary stimulus due to a couple of recent robust employment and inflation reports.

Others believe that a significant announcement is unlikely, a belief reinforced by the rise in COVID-19 cases that forced the cancellation of the in-person symposium. Furthermore, at the post-FOMC meeting press conference on July 28, Mr. Powell said that the Committee would continue to move toward our standard of “substantial further progress,” which will occur in coming meetings.  The Jackson hole gabfest is not an FOMC meeting; ergo, no tapering announcement.

The next FOMC meeting isn’t until September 22, and Jackson Hole will just be a memory.

Even so, there is no shortage of worries for traders.

For starters, September and October have not been kind to stock markets. Since 1987, there have been six significant stock market meltdowns in the US alone, with the latest one occurring in 2008.

The Financial Crisis knocked the S&P 500 from 1285 in September 2008 to a low of 730 in February 2009. That’s nasty, but since then, stock traders enjoyed an uninterrupted rally, other than a few wobbles in Q4 2015 and 2018.

The onset of the pandemic drove the S&P 500 down to 2436 from 3397,between February and March 2020.

Then along came the Fed, Uncle Sam, and trillions upon trillions in fiscal and monetary support. The S&P 500 rallied 84% to 4500 as of August 25, 2021. Even more impressive, prices soared over 600% since the nadir of the financial crisis.

Photo: Wikimedia commons

Thousands of financial professionals have worked a dozen years and never seen a significant stock market correction.  Maybe it is time.

They got a sneak preview of what a market crash would look like when the FOMC minutes released on August 17 sparked a “taper tremble.” Wait till they see what happens when runaway inflation forces the Fed to hike interest rates aggressively.

If the pandemic could knock 28% off the value of the index in just two months, how far would stocks fall from a combination of a delta-variant pandemic, terrorist attacks, and geopolitical tensions?

The risks are there.

The Taliban of Afghanistan have turned the clock back to 2001, (actually it’s about 700 AD, but that’s another story), and Iran has a new hardline, anti-US President, and aspirations for nuclear weapons. The 20th anniversary of the 911 terrorist attacks is a bit over two weeks away.

China and Russia are pledging cooperation to help Afghanistan build an” open and inclusive political structure” that neither country has or wants.

China is also at odds with what it sees as US interference in the South China Sea and with US political overtures to Taiwan. Will Taipei suffer the same treatment as Kabul if Beijing moves in?  The Western governments were all bark and no bite when Russia seized the Crimea, so perhaps China hears opportunity knocking across the Taiwan Strait.

The risk of a COVID-10 delta-variant pandemic is real, even if the containment measures may be somewhat less onerous than those implemented for the first one.  If so, stocks and oil will plunge, and the US dollar will soar. The Canadian dollar would suffer as expectations of lower oil demand due to slowing global growth would drive oil prices lower.

The Canadian dollar tends to rise and fall with oil prices. However, that relationship may decouple if global investors realize that the currency is no longer the petro-currency it was back in the day.

The Federal government has implemented a slew of anti-oil policies and slapped on prohibitive carbon taxes.  President Joe Biden canceled the Keystone Pipeline as part of his climate-change commitment.  He replaced the 870,000 barrels/day of Canadian crude with crude from eco-friendly Russia, which probably uses solar-powered tankers to deliver supplies.  

Shipping to China is not an option as the Trans-Mountain Pipeline is not operational and not expected to be until December 2022. 

The Canadian East Coast is not a viable destination as Quebec blocked pipeline applications.

USDCAD would likely be trading around 1.3000 if the oil premium was removed.

There may not be any holes in one from Jackson hole, but there are plenty of opportunities for bogies in the weeks ahead.