Missing The Forest For The Tree

Over the second half of January, we witnessed a fresh wave of volatility in equity markets, culminating in a pullback that caused widespread concern and endless headlines in the mainstream financial press. There was speculation of a full blown correction, other “experts” disagreed and predicted that central bankers would never allow that to happen, while others still tried to account for the market’s moves by using the same explanations we’ve been hearing throughout the covid crisis every time there’s any sort of bad news in the financial press. 

Among the top explanations was, quite predictably, the virus itself and the “Omicron surge”. Of course, there’s little actual evidence to back that up, especially since the pullback happened after most of the world had realized that there’s nothing particularly worrying about the new strain. In fact, the UK had already announced its plans to open up its economy completely and lift all restrictions, while other European nations were also on track to relax their various pandemic-related measures.

Another popular theory was the Fed’s expected actions. The idea of a “taper tantrum” was circulated rather extensively, and it could have been plausible if there was a taper to begin with. Instead, however, the Fed’s plans only include reducing the rate at which the central bank has been flooding the markets with liquidity, and we’re not even close to a reversal or steps to actually mop up some of that record-breaking freshly printed money. Also, by any measure, interest rates will continue to be extremely and artificially low, even in the event of a “symbolic” hike. Last but not least, let us not forget about the geopolitical tensions that have also been blamed for the choppy markets. The tensions between Russia and Ukraine, the frictions with China and the West, the various internal social disruptions and unrest that are plaguing most of Europe…. While all these factors, especially taken together, could have had an impact on stock markets, the explanation is really a whole lot simpler than that. 

The markets are jittery because they are carrying a huge burden of stocks with valuations that are beyond comprehension and common sense. They have been pumped up by cheap money for years, even before the pandemic, even though the covid “rescue” packages seriously accelerated the bubble formation. This fresh “fuel” certainly helped prolong the ride. Many mainstream analysts took this to mean that the “rescue” remedies had worked and that the “gravity-defying, eternal uptrend” was actually a realistic concept that investors should embrace. This sort of wishful thinking tricked even seasoned investors into really believing that it would all be “happily ever after” post-pandemic. 

Unfortunately for them, but also for the rest of us, reality and the fundamental laws of economics really don’t care about the political narrative or whatever policy aims the central planners might have originally had. Actions have consequences, and we’re seeing them increasingly clearly now. After the unprecedented fiscal stimulus and monetary support of the last two years, there’s simply too much money around, more than any other time in recent history, and nothing left to buy with it. Virtually unlimited funds chasing a very limited amount of goods, or in this case, stocks, is the definition of inflation and although this may be a fairly recent problem for real economy, stock markets have been suffering from it for many years already. 

This is why the recent overreaction over the brief and minuscule losses we saw during the last dip is entirely misguided. Mainstream investors and “experts” appear to be a lot more concerned over the symptom rather than the disease itself. A few points drop, a short-lived pullback of a handful of extremely overvalued tech stocks triggered waves of fears and concerns and calls for action globally, but the fact that the real economy has been deteriorating for months has been going largely ignored. As an example of this cognitive dissonance, in that same period, inflation in the US hit a 40-year high, and that record was reported in the most calm and composed way possible, reassuring the average citizen that there’s really nothing to worry about if they see their paycheck shrink and if they can’t afford to cover their ever-heavier bills. 

Overall, this limited attention span and the insistence to focus on the wrong threat for all the wrong reasons is a phenomenon that mostly affects “industry experts”, the mainstream financial press and investors with a short-term horizon. This short-sightedness will no doubt come back to haunt them sooner or later, when they get caught by surprise once again by the inevitable consequences of the very same policies they’ve been applauding for years. 

Claudio Grass, Hünenberg See, Switzerland

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