EDITOR NOTE: A larger question than "will the Fed relief programs end by 2021," is whether or not the new economy created by reliance upon them will be able to survive without them. Only the day of reckoning will tell.
Investors hoping for years of asset purchases from the Federal Reserve are in for a rude awakening as soon as next year, Henry McVey, head of global macro, asset allocation, and balance sheet investments at KKR, said Friday.
The central bank has spent billions of dollars to support market functioning and pad the economy against the coronavirus pandemic. Markets responded in kind, soaring through recent months on fresh hopes for a sharp recovery. Yet experts are now bracing for when the Fed could unwind its facilities and how the US will pay for its colossal aid efforts.
Governments are set to reach a "tipping point" next year, McVey warned in a Bloomberg TV interview, as their ability to easily raise cash fades to a ballooning debt pile. Bond vigilantes — investors who sell bonds to combat rising inflation — could return in droves and further complicate the government's bond-sale efforts. Such risks will push the Fed to end its relief programs in a matter of months, McVey said.
"I don't think we're going to see the bond vigilantes today, because the bond vigilantes are being overrun by the central banks," he said. "But ultimately that liquidity spigot will turn off by 2021."
A market reckoning could arrive the moment the Fed backs away from its aid programs. Oaktree Capital co-chairman Howard Marks warned earlier in May that current risk-asset prices are "artificially supported by Fed buying," and that he didn't think such levels would hold "if the Fed were to recede."
Central bank retraction is only the first stage of a new economic struggle, McVey said. The macro expert forecasts the coronavirus crisis to push demand 10% lower, double what current prices imply, according to Bloomberg. The combination of weakened income and skyrocketing deficits will necessitate tax hikes and a lasting drag on consumer spending, McVey said.
"The money's not free," he added.
Investors looking to brace for the Fed's eventual unwinding should pivot to companies best positioned to profit from the coronavirus's side-effects, McVey said. Such stocks slid through the week as investors cheered economic reopenings and turned back toward beaten-down sectors. Infrastructure investments and leveraged buyout opportunities are of particular interest at KKR, he added.
Originally posted on Markets Insider