How long will chaos in the financial markets last?

Be greedy when others are fearful and fearful when others are greedy.

Warren Buffett

Only when the tide goes out do you discover who’s been swimming naked.

also Warren Buffett

If you listen to Biden, his Treasury Secretary, the Labor Secretary, and the chairman of the Federal Reserve, the economy is strong and there’s nothing to worry about. It’s pretty funny hearing the “economy is strong” mantra ad nauseam when we just had a negative print for first-quarter GDP – meaning we are already months into an economic contraction as a matter of fact. (Two negative quarters makes a recession. Most investment bank analysts now believe it is less a question about whether we are going to have a recession and more a question of how bad it will be.) It’s kind of like going outside, it’s a hundred degrees, and politicians are insisting it’s parka weather. GTFO.

And, of course, these are all the same people who said inflation was a silly fluke that would not hang around for very long. (“Inflation is transitory!” They are now a full year into this “transitory” nonsense.) We are now looking at inflation levels not seen in decades (that probably underestimate the actual impact of prices on households, if anything) and it’s a foregone conclusion that Democrats are going to get wiped off the map in November as Americans tend to vote with their wallets.

But, sure, all Americans need to hear is that this is all a figment of our collective imagination. It never gets less hysterical they are creating a board to monitor disinformation.

Investors are now openly defying Federal Reserve projections and pricing in TEN rate hikes to counter spiking inflation. The Fed’s credibility on the issue of inflation has been nuked. Futures are even money on a 0.75% rate hike in June following a 0.50% rate hike this week, even though Powell insists that is off the table. Such is the faith the market has in Fed projections. Trust the science, etc.

Treasury rates….

30-year mortgage rates have increased 2.31% since the beginning of the year, which is the fastest pace since 1982. (The last time inflation was running as high as it is now, mortgage rates were over 16%.) We have a rate trend that is typically associated with housing bubbles popping, but housing has a lot of atypical sub-dynamics going now (like the scale of investor participation versus ordinary homebuyers) that may change how things pan out (up or down). We shall see.

In the latest Gallup data, only 30% of Americans think it’s a good time to buy a house – down 23% from a year ago, and the first time the figure has been below 50%.

Usually the “fear trade” (expecting an economic downturn) means investors pile into risk-free Treasuries. That is not happening now because of inflation. Instead, we are watching rates rapidly climb, dragging most other investments down with them. (Rates and prices on bonds move in opposite directions.) Safe havens in an inflationary environment tend to be real assets, not financial assets.

Over the past 25 years, recessions and financial crises have followed the NYSE Composite Index breaking through its 100-week moving average. That just happened this past week.

Tech stocks have been absolutely nailed over the past month. April was the worst month for tech stocks since 2008, and the collapse continued yesterday with the Nasdaq down 5%. It has also broken through its 100-week moving average this week. Over 80% of tech stocks are in a bear market, with large shares down over 75% from their highs. We are definitely in dot-com crash territory here.

Lots of attention has been paid to the collapses of Netflix and Facebook, but Amazon has given back nearly all of its pandemic gains. (I’ve honestly never understood how Amazon was getting propped up for so long, anyway. The only thing that was keeping it profitable during inflation was its cloud business. And the cloud is a bit of a scam. All folks are doing is sacrificing control over their data to rent IT infrastructure from a conglomerate. We’ve had clients laugh at the idea of ceding control over their records to Big Tech. Like, some activist employee gets pissed because someone at your company said something “transphobic” on the Twitter and now all of your business records have been vaporized? Hell to the no, keep that stuff in-house where you can decide who gets to maintain it. That’s an existential question in business. /end digression)

Celebrity tech investor Cathie Wood’s ARKK fund is now 7% below her pandemic peak. The mania the laptop class produced during the never-ending covid melodrama has been completely wiped out. She keeps insisting that deflation is just around the corner and we’ll be back to Zoom or something, however. It’s incredible.

Now this is really something. More than 20% of NASDAQ Biotech Index’s members are trading for less than cash – something that hasn’t happened since tracking began in 2002. This means investors think the companies are worth less than the assets they have recorded on the books (i.e., the companies are worthless). This is the most bonkers chart I have seen in a very long time.

This is something younger generations of investors have never seen in their adult lives, so the cognitive dissonance should be something to behold. All Millennials and Gen Z have ever known is the Fed as a free money machine that turns a blind eye to the mountain of malinvestment it is nurturing. Now a sector that seemed to them like it was built on granite and inevitable returns is sliding into the river. It is difficult to exaggerate what a monumental psychological shift is happening right now. It’s pretty hilarious that anyone thinks we will return to an era where Netflix could finance unlimited shit content with junk bonds.

We are watching employment gains start to level off and conditions look good for them to reverse, which is what one would expect as recession fears build.

After a bit of respite, indicators of supply chain stress are backing up again. This is likely driven by the war in Ukraine and China freaking out over covid yet again.

(These are merely my musings and your private investment decisions are all on you.)

5 thoughts on “How long will chaos in the financial markets last?

      1. So what do you think? Seems like they want us to believe that we are seeing a peak, but it’s pretty much the same as March and gas prices are still rising.

        Liked by 1 person

      2. Not a peak, though they did try to spin that 0.2% difference as the sweet, sweet relief Americans need, lol. Almost as ridiculous as Elizabeth Warren claiming inflation is a corporate conspiracy 🙄

        Liked by 1 person

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