The market collapse was easy to see coming
The roots of the great market crack-up of 2022 — in which a dramatic fire sale is engulfing stocks, bonds, cryptocurrencies and nearly everything in between — have been evident for a while.
The big picture: Workers who watched with awe as their 401Ks soared are now facing the harsh reality that stimulus from Uncle Sam couldn't last forever, and that it came at a cost —namely, soaring inflation.
Details: Fiscal stimulus and loose monetary policy from the Fed helped grease the wheels of the market’s breathtaking recovery in 2021. As the central bank moves to tighten that up, the party has come crashing to a halt.
- Meanwhile, overly bullish buyers drove an ultimately unsustainable bubble in cryptocurrencies, culminating in last year’s record highs. Those chickens are also now coming home to roost, as Axios’ Brady Dale explained on Thursday, with selling and margin calls aplenty.
What they're saying: “There is one thing [the Fed] had tremendous success with," veteran Wall Street watcher and implacable Fed critic Peter Boockvar wrote Thursday. "They get an A+ for creating asset price inflation over the many years and are now doing a bang up job with stoking asset price deflation.”
- Jay Hatfield, chief investment officer Infrastructure Capital Management in New York, said this week that the market pandemonium is “primarily driven …by the unprecedented explosion of Fed liquidity that drove high risk technology investments into a bubble” that’s now being pierced.
- The withdrawal of excess Fed liquidity is also weighing on bitcoin, which Hatfield thinks will sink as low as $20,000 by year’s end.
Our thought bubble: Just as markets display “irrational exuberance” on the upswing, they can display excessive pessimism on the downside.
- There are tentative hopes prices are coming off the boil. And, as some have argued, the current fire sale is a buying opportunity for longer-term investors.
- If the Fed is able to stick the landing with tighter policy without cratering the economy, the current tumult will fade into memory.
But if they don’t…well…buckle up.