With the New Year comes new hopes for the economy and the stock market.
2022 no doubt was a year that many investors would like to forget. Unlike many of the previous crashes of the last few decades, however, the crash of 2022 has been prolonged and severe, and indeed is continuing to this day.
That said, I can comfortably say this crash is very, very different.
Previous crashes were caused by various reasons including but not limited to overindulgence in financial assets, irrational exuberance in stocks in certain sectors, and the bursting of various economic bubbles.
The 2022 prolonged market erosion however finds its roots in rising prices which we know as inflation.
We have had inflation in the past, but it has been over four decades since we have seen inflationary rates of this magnitude.
Previous stock crashes were addressed by increasing liquidity in the system. This means the central bank of the United States, known as the Federal Reserve (the FED), printed up lots of cash and handed it out where they saw fit.
Although it is a well-known fact printing up massive amounts of cash by a central bank can lead to inflation, the FED had a long history of rescuing previous economic calamities by printing dollars without seeing the resulting inflation.
The reasons for this are hotly debated. But just know the Fed had apparently learned over many previous economic rescues that they could get away with flooding the system with cash to save economic and stock market routs without causing prices to subsequently rise.
The repeated rescues of markets by the Fed were soon to be known to Wall Street traders and news analysts as the “Fed Put”.
Specifically, it was now believed that all market crashes would not be allowed to occur, or if they did start to materialize, the Feds would simply do what they had always done and what had always worked: print up copious amounts of dollars and fling them everywhere, but mostly into the banking and financial systems.
Because of the Covid shutdown and the market’s sudden turn down because of it, midway through 2020 the Fed initiated another round of what had always worked before. Print up another blizzard of cash.
But this time the amounts the Fed created dwarfed any amounts previously attempted.
Handing it out not only to companies and the banking system but to consumers as well, they increased the amount of cash in the system by an estimated 40% of all the US cash in existence.
This was and is unprecedented in the history of any and all monetary interventions.
With copious amounts of cash flowing out of Washington to address any and all causes, the Feds and Washington likely lost track of just how much cash was pouring out and what its effects would eventually be.
After all, they had gotten away with it so many times before.
When the worst of Covid had subsided, the economies of the world began the reopening process.
Supply lines however were all but seized up and were extremely slow in restarting.
At the same time, consumers, pent up for months and most flushed with government cash, soon flooded into the streets, and onto planes, trains, and automobiles to escape the confines of Covid isolation.
When a spike in demand by consumers met a severely restricted supply line, prices had nowhere to go but up.
And up they went.
With the triple whammy of copious amounts of inflationary-causing cash now in circulation, a frantic demand by consumers to get out and get going, and constricted supply lines along many fronts, prices continued to skyrocket despite the Feds mistaken assurance early on that price increases were transitory.
Adding to the inflationary conflagration, employers were finding it difficult to fill badly needed job openings to service the increasing demand.
As inflation soared, and the Feds finally acted by raising interest rates to slow it, stock markets started to crate.
Company earnings then started to decline as the consumer pulled back due to higher prices on everything from food to energy and all things in between.
As company earnings cratered, the stock market decline accelerated.
With inflation now underway, the Fed knew and still knows, it could not, and cannot, print its way out of the current calamity.
Creating more cash would now, unlike so many other times before, only exasperate the inflationary wildfires we see today.
This time around, the FED PUT, is no longer viable. It would only make a bad situation much, much worse.
Ironically, despite that fact, Washington is still handing out money by truckload. About five trillion and counting in the last six months alone. Apparently, and appallingly, Washington believes it can still print away its problems, even though the Federal Reserve knows otherwise.
It is why, in this analyst’s opinion, until Washington and the Federal Reserve start using the phone lines between the two, the economic problems of 2022, will probably continue to be the economic problems of 2023.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214.