Once Asset Prices drive the real Economy, Standards of Living become vulnerable to declines in Asset Prices
Monthly Market Commentary: May 1, 2022
The American geopolitical strategist and historian Hal Brands recently penned a column for Bloomberg entitled U.S. Can’t Let Russia Get a Sphere of Influence. The view that the US can’t let Russia get a sphere of influence is nothing new but based on the ill-conceived Wolfowitz Doctrine, which makes it clear that “the price of world peace is the world’s acceptance of Washington’s hegemony.” A similarly arrogant view of the world was shared by the former US Secretary of the State, Madeleine Albright who had expressed the view, “If we have to use force, it is because we are America: we are the indispensable nation. We stand tall and we see further than other countries into the future [just like the Fed – ed. note.], and we see the danger here to all of us.”
I doubt that any empire in history was ever an “indispensable nation” but with the rapid economic growth of China and India over the last 30 years or so, times have changed, and in the case of most countries around the world but particularly for China, India, Brazil and Russia, US hegemony is a completely outdated concept. Paul Craig Roberts, former US assistant secretary of the Treasury for economic policy, argued, “Neither Russia nor China will accept the vassalage status accepted by the UK, Germany, France and the rest of Europe, Canada, Japan and Australia.”
Given these extremely different perspective about power in the world, geopolitical tensions between the western alliance under the hegemony of the US and the “rest of the world” where close to 90% of the world’s population lives will likely increase further.
On a different note, I believe we are already in recession that was caused by the colossal wealth destruction, which has occurred because of the decline in both bonds and equities. From the November 2021 high, the S&P is “only” down 12%, but the NASDAQ 100 Index is down 22% and the NYSE FANG Index (NYFANG) is down 34%. At the same time the long-term Treasury bond ETF (TLT) is down from the early December 2021 high by 21%, and from the all-time high in March 2020 by 32%. In other words, since November 2021, financial asset investors around the world have lost approximately 20% of their money. I concede that there are investors who lost less but there are also a large number of mostly young investors who lost much more because they invested in FANG, meme, SPACs, Unicorns, and other highly speculative stocks such as the popular ARK Innovation ETF, which is managed by Bubble Queen Cathie Wood. Year-to-date, the ARK ETF is down 48%, and from its February 2021 high by 68%.
Exacerbating losses on financial assets over the last twelve months was also the use of high leverage. During bull markets and especially at times of low interest rates in real terms, margin debt tends to expand. During bear markets margin debt usually contracts by about 50%. After peaking in October at $936 billion, margin debt began to decline and is now down 14.5% from the October 2021 peak.…
Why can’t the Fed save the system as it did repeatedly over the last 40 years? The Fed could once again embark on money printing and market manipulations. Given that stocks are already oversold any monetary easing would produce a powerful short term rally. However, the Fed members should remember what Woody Allen wrote in a 1979 essay entitled My Speech to the Graduates:
“More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”
I hope my readers will chose their investments wisely with the view of minimalizing their losses, and I remain in the meantime,
With kind regards