You have to hand it to UBS’ Art Cashin. He loves to play against the crowd.
“Cashin the Contrarian” was very much in evidence in my annual look ahead interview with the NYSE floor legend. We met at our usual spot for the past 15 years: Bobby Van’s steakhouse across from the Big Board in lower Manhattan.
As he is wont to do, Art went against consensus thinking on many topics for 2022, including the idea that the Federal Reserve will become increasingly aggressive raising rates next year, and on just how long inflation will last.
Interest rates: Not as high as everyone assumes?
“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 suggest to the viewers, don’t pay attention so much to the meetings and what was said at them. Remember that Powell has to be reconfirmed in the middle to end of January. So if they move to taper a little too rapidly, if somehow the market takes it badly, he’s got to allow for a back-off.”
“And if we had a sudden sharp drop in the stock market, I think you would see the Fed back off. And I think the fact is, this economy depends far more on the stock market. People’s assets have risen. Back to that consumer, their household assets have risen — some of that is measured by what the stock market does.”
Surprise! Art says inflation will indeed prove to be transitory just when the Fed has given up on the word. He says many companies have double-ordered on supplies and that after the holidays supplies will begin to pile up on the dock. He believes inflation will begin to abate in the first quarter and points to some key dates in China.
“I think product inflation will begin to drop sharply [in early 2022]. I would suggest to you that there are two dates that viewers should watch out for. One is the Lunar New Year, okay, and its celebration in Asia. And secondarily, the Winter Olympics, which are gonna occur in China. I think China is a key function in the demand cycle here, in the supply cycle. And once President Xi gets past those two ones, he’s worried about a food shortage, he’s worried about energy shortages. He’s worried about all of those other things. They should crest at the lunar new year and the beginning of the Winter Olympics. And then I think you will see prices begin to trend down and that I think will be a major headline. People will say wait a minute, in December wasn’t the Fed suddenly dropping transitory?”
Art is optimistic about the ultimate impact of Covid and its many variants. This time next year, he believes vaccines and antiviral pills will have made significant advancements against the disease.
“I think the headline will be that it appears somewhat manageable. We will have to watch for modifications and variations. There is still some belief that this was less of an accident and more of a manmade design gone awry. And if that picks up that will present problems because that will make nations far more defensive and it will restrict things like corporate travel and whenever we look at the airlines today while we move the year into this and domestic travel. Yes, people are going home to see the family on Thanksgiving and whatnot. International travel has not come back yet. So the marker is it will affect the worldwide economy unless it becomes far more manageable. I think the big hope here is less vaccination and more the treatments, the 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.”
Cashin is bullish on stocks, at least for the first half of the year, for one reason: the health of the consumer.
While many characterized 2021 as part of a huge spending boom, Art believes the real consumer spending boom will continue into 2022.
“If Covid moderates to a point where people can go out and about, then all of that money is ready to be spent. And that’s why we had an economy that was pretty good because people have savings in a greater amount than they’ve ever had in America before, in the household. And that’s available to be spent. So if Covid moderates, you could have a sudden economic boom when people go out and start to spend – almost like the post-World War II baby boom, they’re going to go out and spend. People talk about the roaring 20s – we may in fact get it again.”
Another reason Art is bullish: record buybacks have returned.
“Now that we’re moving back toward almost normalcy, believe it or not corporate buybacks are back at the high level they were before the outbreak now what caused that I’m not entirely sure, but it has been a big boost under the stock market. And if it continues, we’ll, you know, you and I will discuss it and look at earnings and other things. But corporate buybacks over the last four years have been a very, very important factor in the rallies and bull markets that we’ve seen.”
Art believes that megacap tech stocks (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.”
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, analyst estimate S&P 500 earnings will rise 10% next year. Cashin believes it will be “Certainly 15 and it could be 20 [percent higher].”
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.”
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 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.”