2022 no doubt was a year that many stock investors would like to forget. Unlike many of the previous crashes of the last few decades, 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 a variety of reasons including, but not limited to, an overindulgence in financial assets, irrational exuberance in stocks and the bursting of various economic bubbles.
The current market crash however finds its roots in rising prices of which we know as inflation. 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.
Just know that the Fed had apparently learned over many previous economic rescues that they could get away with flooding the system with cash without causing prices to subsequently rise. These repeated rescues of markets by the Fed was soon to be known to Wall Street traders as the “Fed Put”.
Specifically, it was now believed that if severe market crashes started 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 into the financial system.
Then came the COVID shutdowns and the markets turned down hard in March of 2020 because of them. Once again the Fed fired up the printing presses.
What was different this time around however was the amounts of cash 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, an unprecedented monetary intervention to be sure.
With copious amounts of cash flowing out of Washington to address any and all COVID-related problems, the Feds and Washington apparently guessed they could print up whatever was needed and again not cause inflation. 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 now flushed with all this government cash, soon flooded into the streets, and onto planes, trains and automobiles to escape the confines of a COVID isolation.
When a spike in demand by consumers met a severely restricted supply line, and huge amounts of newly printed cash sloshing around everywhere, prices had nowhere to go but up. Adding to the inflationary conflagration, employers were finding it difficult to fill badly needed job openings to service the increasing demand, which only made the situation that much worse.
While prices rose, the Fed mistakenly thought the inflation was transitory and did nothing to address it. As inflation continued to soar, the Fed finally acted by raising interest rates and stock markets subsequently began to crater.
Company earnings then started to decline as the consumer pulled back due to increasing inflation. As a result, the stock market decline accelerated.
With inflation now heavily entrenched, the Fed realizes it cannot print its way out like it had done so many times before. Creating more cash would only exasperate the inflationary wildfires that are incinerating consumer pocketbooks.
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 the 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”