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Asset price deflation - the real threat
Monetary policy easing led to the truly scary inflation of asset prices
Yesterday’s post - about how the “Lords of Easy Money” deployed low rates and injected trillions of dollars of liquidity (QE) into financial markets which in turn inflated asset prices, and how the collapse of asset prices poses a much graver threat to the economy than consumer price inflation (CPI) - got me wanting to stand the story up. So today the post addresses falling asset prices, and how losses from the collapse in the value of assets shrinks global liquidity, that is, the finance available for investment, debt payments etc.
When losses pile up and global liquidity shrinks, money or available cash (liquidity) becomes more valuable.
But collapsing asset prices also leads to the failure of banks, including shadow banks, and other creditors…Pension funds that are invested in those assets, may also be affected.
First up is an asset in which millions of Americans are invested: the US stock market. As Ian King of Sky News notes: US equities have led the downward trend, particularly the Nasdaq…
Part of the reason for the fall in the valuation of stocks, is because of the extraordinary fall in the value of inflated Silicon Valley Tech assets. As King explained on 10 May this year:
“An estimated $1trn has been wiped from the collective value of leading US tech stocks during the last three trading days, with Tesla falling in value by $199bn, Microsoft by $189bn, Amazon by $173bn and Alphabet, the parent of Google, by $123bn.
Those billions of dollars of losses represent “big potatoes” (to quote author Damon Runyon’s wise-cracking New York gangsters) for hapless investors.
Then there’s the bond market “carnage” MarketWatch reported on this 4 July, 2022:
The first half of 2022 has been a historically bad stretch for markets, and the carnage hasn’t been limited to stocks. As stocks and bonds have sold off in tandem, investors who for years have relied on the 60-40 portfolio — named because it involves holding 60% of one’s assets in stocks, and the remaining 40% in bonds — have struggled to find respite from the selling.
Practically every area of investment (with the exception of real assets like housing and surging commodities like oil CL00, 1.35% ) has underperformed cash and cash equivalents, like short-dated Treasury bonds.
According to analysts at Goldman Sachs, Penn Mutual Asset Management and others, the 60-40 portfolio hasn’t performed this bad for decades.
“This has been one of the worst starts to the year in a very long time,” said Rishabh Bhandari, a senior portfolio manager at Capstone Investment Advisors.
Earlier this year I attended a conference for European CEOs that included presentations by some very distinguished economists. One of the sessions was on “Open Banking”
Open banking is the process of enabling third-party payment service and financial service providers to access consumer banking information such as transactions and payment history. This practice is possible through the use of application programming interfaces (APIs).
Open banking promotes interoperability and networking between banking information and service providers, creating a smoother user experience.
At this event speakers spoke enthusiastically of the future of ‘Open Banking’ providers. Klarna, a Swedish fintech company that provides online financial services such as payments for online storefronts and direct payments along with post-purchase payments - was spoken of, and recommended, highly.
On 1st July this year, the FT published this story:
$6.5bn is just fraction of the $46bn it was valued at just a year ago, three people with direct knowledge of the matter said.
The dramatic decline in the worth of what was one of Europe’s most valuable private companies highlights the extreme reversal in sentiment for cash-guzzling, growth-chasing start-ups. It also shows how investors have soured on “buy now, pay later” companies such as Klarna, which provide a form of short-term credit. Only a year ago, Klarna was able to double its valuation to $46bn after a $639mn funding round amid a boom in ecommerce during the coronavirus pandemic. That funding round was led by Japan’s SoftBank, the investment group behind a disastrous bet in office-sharing group WeWork.
Ah, WeWork…one of the recipients of ‘easy money’ and among the first to collapse.
At its height, WeWork was valued at 47 billion dollars. It was one of the most valuable startups in the world, also known as unicorns. Despite investors giving billions of dollars to the company, its plan to go public in 2019 fell apart in a spectacular fashion. Still, Adam Neumann, the founder and ex-CEO, walked away with hundreds of millions of dollars
And we can’t stop at these falling valuations without mentioning those wicked ‘assets’ that were, and are, Crypto. Today the Financial Times reports that the value of investments in Crypto assets “has imploded.”
The total market capitalisation of cryptocurrencies has plunged below $1tn from more than $3.2tn last year….
Black Americans’ higher exposure to cryptocurrencies has left them more vulnerable to the financial downturn, even as their households on average hold less wealth. The attraction of building wealth, amplified by marketing, drew many black investors into cryptocurrencies. The dollar price of bitcoin rose by 9,300 per cent in the five years to its peak in November.
There is one asset class whose inflation, as this SoberLook chart shows, was extraordinary: US housing. Will this asset market fall? And if so, when?
I’ll stop there for now…but you get my gist….