Opimas CEO Octavio Marenzi joins Yahoo Finance Live to discuss the outlook for 2022 markets and how markets are responding to possibilities of Fed rate hikes and a slowdown in growth due to the Omicron variant.
Video Transcript
- We want to keep more on the market right now. And for that we're going to go to Octavio Marenzi. He is Opimas CEO. And, Octavio, glad to be here with you today.
Just want to get your thoughts as we close out the year what you're thinking about as we head into the new year, Fed tapering, inflation, all that good stuff. How do you put it together and tell investors what you think will happen?
OCTAVIO MARENZI: Well, I've been expecting actually with the Fed tapering its bond purchases, and I think most people have been expecting, that somewhere along the line to actually start to see interest rates start to creep up and 10-year yields and 30-year yields go higher as the bond-- as the Fed sort of cuts back on those bond purchases. That of course would be very, very bad for the equities markets and I think would lead to some sort of correction.
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But I think the markets are now sort of calling the Fed's bluff a bit and saying, we don't believe you're really going to do it. We think you're going to carry on buying bonds at this rate.
And you've had a bit of a taper. So you've slowed down slightly over the course of the past few weeks and months. But we think you're going to go right back to where you were. And Omicron is probably going to be the reason to do that.
So we're starting to see rumors of an economic slowdown or certain sectors of the economy suffering as a result of Omicron and new shutdowns or shutdown lights coming into place and lockdowns. And that is sort of giving the Fed the ammunition to continue a very, very soft monetary policy, a very expansive monetary policy, which can be really good for markets.
So we haven't seen the interest rates budge. And I think the reason for that is that markets, or the smart money, is basically saying, we don't believe the Fed is going to go there really.
- And I just want to get your reaction to the CDC guidelines that now reduce the isolation time that's required for asymptomatic people with COVID. Is that something that's a positive for markets, particularly for hard-hit stocks like airlines who have just taken a beating especially recently?
And do you think to some degree that markets are already pricing in that COVID, then, now at some point turns into an endemic? It's going to be here for a long while while we're still sort of seeing headlines in the news about it being a pandemic.
OCTAVIO MARENZI: Well, I think the only thing that markets are concerned-- I shouldn't say "the only thing." But the primary thing the markets are concerned about right now is the Fed's policy and what is the Fed going to do. And it's been these really low interest rates and this very expansive monetary policy that's driven markets to the highs that they're at at the moment and continues to.
So I think the market is assuming those things will continue. So yes from an economic perspective, clearly it's better to have shorter recovery times or shorter quarantine times and isolation times so you can be more productive. So it certainly helps the real economy.
But I think there is a bit of a disconnect between the real economy and Wall Street at the moment that we're seeing quite clearly and there has been throughout this shutdown. And the lockdowns we've seen didn't really impact Wall Street at all. And markets just plowed through that and went to record highs without any real economic justification for that.
So I think it's all about the Fed and what the Fed does and how much money the Fed pumps into these markets, either directly or indirectly. And in that case, perversely, bad news around Omicron might be good news for the market because it gives the Fed the impetus to continue with these very loose monetary policies.
So I think too much good news for the real economy might actually be quite bad for the markets. And so you want to actually sort of find that middle ground somewhere. So obviously if we have really hard shutdowns and the economy comes to a crashing halt as a result of Omicron, which I don't think will happen but let's assume it did, that of course would be very bad for markets.
But if it's sort of just in the middle, it's sort of an irritation more than anything else-- of course if you're afflicted by it, it's much more than an irritation. But if that is the case, for the economy as a whole it's just an irritation, but it allows the Fed to continue these monetary policies, it's going to be very good for the markets. And I think that's what we've seen over the course of the past few days.
Basically people say, well, if Omicron does rear its head, the Fed will carry on pumping money in. And that's going to lead us on to record highs day after day almost.
- And, Octavio, let's think about a different scenario, notwithstanding your belief that the market kind of got ahead of the Fed, which I happen to agree with. But the Fed has gotten caught behind the eight ball many times in the past and has had to play catch up with inflation, some times worse than others.
The early '80s are a memory, as well. Though I don't think we're going to repeat that. What happens if the Fed simply loses control over inflation next year and finds itself having to hike rates a little bit aggressively?
OCTAVIO MARENZI: Well, I think what we'll see then is the market will-- actually there'll be a severe market reaction then. It will come tumbling down. The markets, equities markets and bond markets, will be a very bad place to be. The smart money will then be in absolute cash in very, very short-term money market instruments or actually just bank deposits or something like that.
I don't think any asset class will be spared there because most asset classes, including things like cryptocurrencies and real estate and all this, are basically dependent on Fed largesse. So that is really what the driving force is there.
So if we do see those kind of interest rates jacked up the way we did see in the early 1980s, we'll see a sharp market correction and interest rates really go through the roof. So I think interest rates in the early '80s went up to 15%, 16%, even as high as 20%, depending on which bonds you're looking at.
So if you've been really clever back then in the early '80s, you would have sold your equities positions and put everything into government bonds when they were yielding about 15%, 16%. And as those yields came down in subsequent years, you would have seen the value of bonds go through the roof.
I think something like that might play out again. So if we see interest rates go really high-- and I don't think the Fed will do this. I think they'll be very reluctant about doing it.
But if they're really forced, if inflation goes up about 10% or something like that, their hand will be played. And they'll have to do it. And then watch the markets crash. And jump into bonds. But timing that is going to be fiendishly difficult I think.
- Well, let's bring it back to the here and now. And when yields do presumably move-- as you say, they're stuck right now. We're 1.4%, below 1.5%. When they do cross 2% hopefully sometime next year, is it a shot higher? Is it very quick like we saw at the beginning of this year? Or does that happen more gradually, do you think? And what does that mean for equities?
OCTAVIO MARENZI: Well, I think the Fed will control that. So they have basically absolute control over how quickly interest rates shoot up or go sideways or what they do. So they can control that quite finely with their bond purchases. And they can keep an eye on that. And so I don't think they'll let it shoot and get ahead of them too quickly.
They look for a gradual increase up to 2%, 2.5%, maybe back up to 3% or 4% that we've seen more historically in terms of the 10-year yield. So I think they'll do that slowly and gradually and not try to spook the markets. And they have the tools at their disposal to do that.
So I don't expect to see a sudden burst up to 3% or 4% in terms of the yields on the 10-year bond. That will happen gradually. And that's the way the Fed was going to want to play it.
- All right, Octavio Marenzi, Opimas CEO. Thank you so much for your time today. We will leave it there but wish you a very, very happy new year.