It is now obvious to everyone that a decade of ultra-easy monetary policy has created asset bubbles around the world, and it has just come to an end. The first signs of problems are related to market inflation and hit high-risk assets the hardest.
The markets opened with a drop, the crypto industry inherits them - when will the drop stop?
Economists today point out that the trend has covered all sectors of financial markets: the bubble is "simultaneously bursting" in the sectors of cryptocurrencies, palladium, long-term technology stocks and other historically risky areas of the market. The collapse of speculative spheres is taking place as the US economy prepares for a hardcourt from the Federal Reserve.
So, one of the portfolio investment experts shares his opinion: "The reduction of liquidity by the Fed will lead to an increase in both the risk premium on stocks and interest rates, which will continue to disproportionately affect the riskiest assets on the market, including impulse investments in unprofitable technology stocks, meme stocks and especially cryptocurrencies that have no intrinsic value."
Thus, he says that the market can react to a reduction in liquidity in a standard way. However, not everything is so obvious.
Of course, so far all speculative sectors show an outflow of funds. Very indicative against this background are the quotes of the flagship innovative ETF ARK Investment Management from Katie Wood, which shone with neon lights of super profits throughout 2021. Now it has fallen by about 46% from the record high recorded in February 2021.
The Fed's hawkish signal has hit hard at all the tech companies that gained momentum in previous periods, and many of them, including Tesla Inc. and Roku Inc., are strategic investments in the ARK Investment portfolio.
The technology portfolio from Goldman Sachs Group Inc. also fell after multi-year highs, while the SPACs tracking index tumbled down 35% from its highs.
"The potentially rising interest rate environment is forcing investors to overestimate the risks they are willing to take," said Todd Rosenblatt, head of research at one of the investment institutions. "Having a higher growth potential, but less stable business is losing popularity, while investors prefer more stable ones."
However, he does not consider the unwinding of these areas of the market to be a burst bubble.
"I don't like the phrase 'bubble' because it only becomes obvious in hindsight," Rosenblatt added. "We are in the middle of this trend, and it may or may not change course."
This contradicts the point of view of many other economists, known for statements like "The bubble makes you believe in it until the very moment it bursts." But after the 2008 crisis, the Fed has twice used a new method of ultra-low interest rates to stimulate the economy, and in 2013 it worked. So far, we don't know much about the capabilities of this mode for long periods of time.
High-risk assets lose their appeal, but this is natural
Over the past decade, the economy has become too speculative, attracting retail traders from all over the world. Perhaps they will not be ready to give up, and will create enough bullish liquidity to hold the markets, as it was all December 2021.
But so far, the Nasdaq Biotech index, which includes companies such as Amgen Inc. and Gilead Sciences Inc., is already losing. So, in the first week of the new year, the rollback was 6.5%, which was the worst five-day period since mid-March 2020. And all these are the consequences of the impact of the rotation of investors from high-risk and high-profit stocks in the field of traditional havens.
Meanwhile, the Invesco Solar ETF last Thursday saw a decline of more than $70 million – the largest decline since March last year. The fund, which showed growth of more than 230% in 2020, has lost its luster.
Cryptocurrencies have not escaped speculative erosion. Bitcoin is down about 40% as of late Friday after hitting an all-time high of almost $69,000 in November. Ether, the second largest cryptocurrency by market value, has fallen by about 35% compared to November highs.
According to Noelle Acheson, head of market analysis at the investment company, the drawdown in bitcoin "seems to be more caused by short-term traders and investors who view BTC as a risky asset and tend to liquidate positions to reduce the risk of their portfolios." "In addition, leverage in the market is not at an excessive level, but is increasing, which means that the elimination of derivative positions helps push the market down."
In other words, now those traders who hold a "weak hand" have got rid of BTC, while intraday trading supports the exchange rate more.
And now the question remains: will traders who bought futures on high-risk assets hold their positions? It is quite possible that they simply will not be ready to merge very interesting positions recently, and then the market will refrain from further decline.
The weakness of technology and cryptocurrencies have also become a double blow to all exchange-traded funds that focus on both of these industries, for example, the Global X Fintech ETF. The fund, which includes both start-up technology firms including Affirm Holdings Inc. and cryptocurrency-related companies such as Coinbase Global Inc., has fallen 30% since hitting a record in October.
This once again confirms the idea that it is good to entrust investment management during favorable periods of investment thaw. But when the first signs of market contraction appear, and they arrive together with the news of the Bank of England's rate hike in early December, it is always better to keep control of the invested funds in your hands.
But even retail traders do not yet know where the economy will move and where is the shelter that will allow them to trade calmly during the period of turbulence.
For example, the Hang Sang Tech index has fallen by about 50% from its highs at the beginning of 2021, as large-scale corporate regulations and concerns about a housing bubble affect Chinese technology stocks. That is, the Asian market inherits the high-tech USA. And even more so, the crisis of the real estate industry has crippled the flagship of the region - the yuan.
The goods also deflated. After years of growth, as a result of which palladium reached a record level in May, the metal fell in price by about 35%.
Even gold has adjusted today, despite the rise in bond yields. Oil and gas are declining, although these corrections can be considered frivolous.
"What we have seen in the past, when rates were raised either due to the postponement of the Fed's rate hike expectations, or due to 10-year growth, it seems that technology and some growth models suffered more from the valuation side," says Jerry Brackman, president of First American Trust in Santa Ana, California.
It makes sense. Ultimately, the economy cannot always grow, especially if it grows only at the expense of a cheap dollar, and not at the expense of real GDP growth, as it should be in the best scenario.
Thus, it is now clear even to beginners that we have entered the phase of a global correction, and given its volume, it is quite natural to call this correction "blowing bubbles".
The main question now is at what level of correction is the economy ready to turn around, even if not into growth, but at least into normal oscillatory movements in a narrow range?
If the strongest wave of turbulence caused by the news about the beginning of the economic era has already taken place, and the market will meet the subsequent news more calmly, we have every chance to skip the difficult period of exit from the soft regime. In this case, large investment funds will stand, several dozen small investment companies will burst, but these risks are embedded in the working conditions of lending banks, and are insured, so the economy will survive.
If any news about another reduction in funding from the Fed causes such an outflow without signs of optimization, the market will not withstand even the second stage of decline, and Goldman Sachs expects four in total.
We cannot afford to forget that the Great Depression also began with a series of local corrections that stretched over a year and a half before the market lost its strength and collapsed in all sectors.
A lot depends on the ability of borrowers to repay their loans, both in trading and in the real sector. The biggest danger is loans with poorly secured liquidity - overvalued assets. For a short period of time, inflation can even insure the collateral by supporting its price at least nominally. But this is a short period. And if the exit from the crisis drags on, the revaluation of assets will force banks to ask for additional collateral. And this is the most terrible scenario for many economies that will no longer have anything to support their banks – the world's resources of state loans are exhausted.
Government bond servicing debts can also be a heavy burden on developing countries, as their currencies depreciate due to inflation.
As a result, it is too early to talk about the beginning of a large-scale crisis. Especially considering that the leverage is still growing.
This suggests that the economy is still digesting the financial interventions of the era of the cheap dollar.
However, the risks are now higher than ever. That is why bitcoin and other high-risk assets will probably not be popular until spring. After the March restrictions, if the economy holds up, interest in them will wake up again. So far, the resources and currencies of the commodity-producing countries look much more attractive.
The Nasdaq Composite lost 2.18%, and the SPX declined by 1.43%, which is quite a serious fluctuation even against the background of the SPX jumps in October-December of the 21st. The euro/dollar pair fell by 0.55%, but the yen and yuan are growing.