May 10, 2022 - 3:00pm
Warren Buffett once said that when the tide goes out, we see who was swimming naked. The market sell-off that has taken place over the past few weeks has revealed more than a little nudity.
The most striking thing about the sell-off is how broad it is. Most markets seem to have taken a hit, but the sell-off seems mostly driven by the tech sector. The NYSE FANG+ index, which tracks the biggest tech players, is down just under 35% from the start of the year. The broader tech heavy NASDAQ is down just shy of 27% in the same period.
But the sell-off has spread to other markets too. Bitcoin is down just over 27% this year. Gold is up since the start of the year, but it has taken a beating since March-April. Most interestingly, bonds have fallen too; a typical ETF that allows investors to get exposure to the US treasury market is down around 6.5% since the start of the year.
This wasn’t supposed to happen: when stocks go down, bonds are generally supposed to go up. This is why investment advisers tell investors to hold a mixed portfolio of bonds and stocks. The bonds are supposed to provide a sort of insurance for when the stock market hits the wall.
The fact that bonds and stocks are moving together is indicative of a much broader problem: namely, inflation and the possibility of stagflation (low growth and inflation). Typically, investors assume that inflation happens when growth is high, but today we are seeing high inflation and low growth.
In the first quarter of 2022, the US inflation rate was 8% while real GDP shrank by 1.4%. Markets had long been discussing the possibility of stagflation taking hold but seeing such poor GDP figures last week while inflation is so high caused a freak-out in the markets.
The situation does not seem great. After months of lockdowns, our politicians have found new reasons to intervene aggressively in our economies, and this is provoking the stagflation monster — the war in Ukraine seems to have provided them with a blank cheque on clumsy interventions. Given that inflation tops the polls in terms of voters’ concerns, I find some of these actions hard to understand.
We cannot call stagflation definitively yet. We need to see what happens in the coming months, but it certainly looks like a possibility. In such an environment, those who hold savings are going to get punished. There is simply no guaranteed asset class available that guarantees tangible investment returns in this sort of climate.
What about the real economy? Those with large stock portfolios will feel the pain of these losses. This can pass through to consumption — a phenomenon economists call the ‘wealth effect’. But with inflation raging, people will also want to offload their decaying cash and buy products before the prices rise even higher. Unfortunately, the next few months are going to be very rocky indeed.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeExcellent though depressing article. The writing has been on the wall for the economy for a long time. This will be the biggest story of 2022, imo, and western politicians grandstanding over Ukraine won’t distract voters.
“There is simply no guaranteed asset class available that guarantees tangible investment returns in this sort of climate…people will also want to offload their decaying cash…”
Which is economist-speak for there’s no place for the ordinary person to hide from this situation. Somehow Unherd only gives this story a little space here in The Post; Unherd just doesn’t seem to like economics. Tough luck. Like it or not the economy is about to become an object of unavoidable, and terrible, fascination for the foreseeable future.
I wonder if Unherd will allow Mr. Pilkington to write a full article on how we eventually get out of this mess.
See below:-
Spot on!
‘Sanford’ formerly of this forum, was always complaining about the lack of economic analysis on UnHerd.
Now that we really do face a winter of unprecedented discontent perhaps things will change?
However the economic disaster awaiting us will afford a great chance to jettison all this debilitating Green & Woke rubbish that currently so bedevils us.
“Every cloud etc etc”
There’s nowhere to hide your money because its the money that’s losing its value. Years of money-printing has diluted it. Reminds me of when I was a teenager and watered down my dad’s liquor supply to hide my consumption. First just a little, then a little more, then more. Eventually it seemed like I could get away with anything and I got more and more greedy. One day my dad just spit out his martini because it was mostly water. He said I would have been in far less trouble for just drinking the gin instead of ruining what was left behind. Its a pretty good metaphor for where we are now I think.
If we’re to believe the proponents of homeopathy, watering down your dad’s liquor will have made it stronger.
My favorite homeopathy story was when Billy Joel’s daughter attempted suicide by taking an entire bottle of homeopathic pills. In the comments section of the news story someone says “Finally! Homeopathic medicine saves a life!”
I know. I’m going to hell…
It must be true, the Telegraph’s AEP and Jeremy Warner have said the same – and they’ve predicted 27 of the last 3 recessions.
Distressingly, I think you all might be right this time!
I haven’t learned much over the years, but one thing I have learned, is that an Economist is never, ever, right. Economists are the only species I know, where two individuals can hold diametrically opposed views, and yet both are guaranteed to be wrong – one of the great paradoxes of mathematics and logic.
Prashant,
It has often been noted that Economic Forecasters only exist to make Astrologers look credible.
Pointing out the truth will portend dystopia and that turns people off. But the truth is, our governors (government, media, educational institutions) in the US, in particular, have pulled out all the stops to remain in power. Like the Borg, they come back with some solution that protects them and only postpones the day of reckoning. They have flooded the markets with a tidal wave of money to buy votes of confidence. They have diddled with interest rates to the point that price and value discovery are completely lost. They have gamed the election process to the point of destroying faith in democracy and now in Eastern Europe, the unstoppable force (NATO) has met the immovable object (Russia). Mix all that with an explosion in human population fast approaching a demographic cliff and it is truly the mother of all perfect storms.
We were certainly due for one.
I’ve got tulip bulbs for sale, any buyers?
Are they edible?
Warren Buffett also said: Be fearful when others are greedy, and be greedy when others are fearful. The markets have corrected enough now to look reasonably valued. For longterm investors, this is a good time to acquire desirable assets of their choice.
My opinion fwiw.
There is a crash coming, but not yet. Another 18-24 months before everything tanks. In the meanwhile? I reckon another ramp, in stocks and many other asset classes, is coming. Perhaps another 30%+.
What will trigger this ramp? Who knows? Ostensibly, perhaps Putin gets deposed, or Xi decides to join a monastery in Tibet, or Johnson declares he is really an alien from Betelgeuse come over on one of them UFOs. Who can tell? But the individual events would just be sop, a peg, for historians to hang their retrofitted narratives on.
And after the crash? Well I reckon this is the big one, but not in one piece, not a one and done. A very very horrible two decades plus coming up, like after the ’29 crash. A recovery followed by another crash worse than the first, with the same pattern a couple of times over, spanning years.
What will play out will play out.
In 1920s they did not have Modern Monetary Theory!
True – Keynes’ General theory was the 1930s.
THE economies arising from globalisation and supply chain efficiency have had a downward pressure on prices since the turn of the century. This has cancelled out upward pressures in other areas.
NOT only have those economies run their course (there’s nothing left to globalise), our need to shorten supply chains is undoing these economies. At the same time, the upward pressure on onshore and labour intensive prices continues. The need to reduce consumption can only come from one place: higher prices.
TO my mind the Deliveroo culture sums it up: we’ve driven “efficiencies” so that not only do you not have bother to cook dinner, nor do you have to bother to have a ready made meal, nor do you have to bother to fetch a takeaway that someone else has cooked, you get someone else to go to the takeaway for you. If this behaviour becomes unaffordable I won’t be upset.
Yes.
Yes…
Pretty sophomoric article. When you create $5 trillion of anything out of thin air, the value of it goes down, regardless of the reason. End of story.
The governments have used a series of ‘crises’ as excuses to abandon all fiscal sanity: Climate Crisis, China, COVID, Ukraine, etc. We have to stop believing in all their lies.
Recall what the horrible Rahm Emanuel said: “You never want a serious crisis to go to waste….” “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.”
And they are manufacturing crises out of thin air – literally in the case of
Climate Change … Global Warming.Yes
Yes
German industry predicts a disaster, there economists predict the economy will contract by 15% meanwhile the Greens have stated Germany will become deindustrialised asap. And we know all about the oil and gas situation so there you have it.
The govts are ‘all onboard with this’, whatever this is.
Yes
No! An open forum can’t please everyone all the time.
It’s not a matter of pleasing everyone, more to do with random and irrational censorship
I am financially ignorant but I have noticed that sterling has fallen against the dollar (£1.40 to £1.25) with similar large falls with the euro.
It makes me wonder if they are benefitting from the war in Ukraine while Europe struggles and Africa suffers.
The wonders of financial engineering and ETFs has given the retail investor an outlet in short index etfs such as XSPS.
Every time the S&P goes down, XSPS goes up by the same percentage. Magic! You can even have it in your ISA.
Just make sure you have an exit plan for the bounce.
Yes
As at 22.40 BST the Yes’s have it by 19 votes to 1. Bravo!
I notice that Bitcoin is losing value alongside the markets…”UK economy unexpectedly shrinks” says The Guardian I see on ZeroHedge. Hard to reckon with economic blindness as gleefully obstinate as that! All I can say is once the markets break physical gold has always been the refuge. History wins over economists.