The Dow and S&P 500 posted their worst three-month period since the first quarter of 2020 when
Covid lockdowns sent stocks tumbling. The tech-heavy Nasdaq is down more than 20% over
the past three months, its worst stretch since 2008.
The 20 percent fall of S&P 500 in the first 6 months of 2022 is theworst half since 1970.
It's led by worries about federal reserves interest rate hikes, unprecedented surging
inflation, China’s covid lockdown, and Russia's invasion of Ukraine. That’s not a joke.
The w orst year in half a century tells us a lot about how bad the situation is. Even
getting rid of the gold standard in 1971 by Nixon didn’t cause such a crisis. It's not
just about the SP500. Look at the Nasdaq. It’s having some of its worst times in decades.
We have already had a wave of bankruptcies, especially in the crypto world. If this was
the end, we could have said, all right, we had a bear market, and things will get better
soon, but the problem is that this is just the beginning.
We have already discussed in previous videos what has caused such a bubble in the last
2 years, but what's happening now isn't just about the last 2 years. The crisis is much
deeper than that. The bubble that’s now unfolding in front of us is the result of
the fed's action for the past decade, if not more. So it's not going to go away in just
6 months. What we have seen in the first half of 2022 is just a taste of what's coming.
The fed perfectly knows that, and it is not much it can do, so it's trying to soften the
pain. It’s not going as soft as we would like, but we should get used to it because
it seems like everything bubble is about to burst.
But the question is - what is the everything bubble? How did we end up creating such a
massive bubble? And how bad the coming recession will be?
We will answer all of these questions and many more, but before we do that, give this
video a thumbs up, and let's dive in. In January 2022, as measured by the CPI-U, inflation
posted its most considerable 12-month increase since February 1982. The 12-month gain was
7.5%, up from 7.0% in the period through December 2021. Price hikes for food, electricity, and
shelter majorly contributed to overall inflation. That's when the fed could no longer hide that
it was worried about inflation. No matter how many more times it hiked the rates after
that, it didn't help since, in February, the rate was 7.9%, and in March, it got worse
and rose to 8.5%, in April, 9.6 percent, and finally in June 8.6 percent. If we compare
that to June 2021, that's multiple times higher since inflation back then was 2.1 percent.
So what exactly happened so suddenly that things got out of control in a glimpse of
an eye. Well, nothing. Inflation has been around since
the fed used quantitative easing to save the economy in 2008. Wait for a second; if you
look at the data, inflation has averaged around 2 percent for the past 15 years. If we are
talking about consumer prices, then yes, but if we are talking about asset prices, then
the answer is slightly tricky. Since the world got hooked on easy monetary policy and quantitative
easing, it did everything possible to keep asset prices rising.
From January 2010 to January 2022, the sp500 grew by around 300 percent, while if we take
the exact period prior to that. From 1998 to 2010, it grew by just 4 percent. and that's
not like the economy grew much faster during that period. It grew by around 2 percent annually
as it did before, but what exactly was different this time?
The central banks across the globe, with the fed being at the head of them, loosed financial
policies so much that they gave us the illusion of growth. Yes, look at the numbers. Everything
was growing really fast but did our efficiency at that rate as well? No!
Did we build much more factors? No!
Did we hire more people? No!
This is the number of dollars in circulation. Until the 1970s, the amount of currency in
the economy was stable. It grew insignificantly after 1971, when the US dismantled the gold
standard. It didn't right away print an enormous amount of cash and throw it into the economy.
However, it gradually began rising. However, in the summer of 2008, there was a spike,
that's when the fed threw trillions into the economy to save it, and since then, the amount
of cash in the economy skyrocketed, reaching its peak in 2020 when a global pandemic hit
the world. All of that cash should have created inflation,
but as we have looked at the consumer price index, inflation was relatively stable at
2 percent, but asset prices have skyrocketed. And since 80 percent of the stocks are owned
by the top 12 percent of the population, only the super-rich have benefited from the fed’s
easy monetary policy. Just take a look at interest rates. From 2009 to 2015, rates were
almost 0 percent, and the fed began slowly raising them just in 2016.
When you are given free money, it's easy to grow because you can always borrow money for
free to show that you are doing great. The challenge is to make money without borrowing
free money. With low-interest rates, companies borrowed
and invested wherever they could, even if these projects were unprofitable, but it wasn't
a big deal since even if you don't make money, you can compensate for that by borrowing more.
The situation got so absurd that the European Central Bank had a negative interest rate
for over 8 years. It supposes to be the other way around, you
work and create something valuable, and in return for delivering that value, you are
financially rewarded but with negative rates, you are rewarded financially just for borrowing
money, so if you are not going to use that money wisely, you are not losing anything
since rates are negative. Of course, that's an oversimplification because things are a
bit more complicated since negative rates at central banks don't nessasirily means negative
rates by the time it reaches the consumers, but you get the point.
So the growth that we had since the 2008 financial crisis was fueled by cheap money and multiple
bubbles, such as the bitcoin bubble in 2017 or 2020. Low-interest rates also led to stock
buybacks. When a price of a stock increases, we usually assume that it's because the company
is performing better. It might have built more factories, hired more people, and innovated
new products, but that's usually the case. COmpanies used cheap money to buy back their
stocks which decreased their number of shares in the market and hiked the price.
In 2020, low rates led prices to rise as much as 25 percent. Did houses instantly become
bigger, better, or more convenient? Not all! Everything was driven by easy monetary
policy. We got so comfortable that we came to assume that investments will go up no matter
what, but how can something rise when no additional value has been added. So imagine for a moment
how big is the bubble we have created? Bubbles are normal since the economy goes
through cycles from expansion to contraction once it reaches its peak. The problem is that
economic cycles happen every 3 to 5 years, but our last expansion started around 2009
and continued until the end of 2021. Over a decade of economic expansion was driven
critically. It created such a huge bubble that we still have no clue how big it is.
And now it came to hunt us down by stock market collapse and high inflation. On top of that,
the crisis we are facing now has exacerbated everything. All that the fed can do is soften
the crisis. It is difficult to say how long it will last at this point, but what's certain
is that the worse is yet to come. Thanks for watching and see you in the next
one.