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Wolf Richter: The Price of Easy Money Now Coming Due

Guest post by Wolf Richter from WolfStreet.com:

The era of money-printing and interest-rate repression in the United States, which started in 2008, gave rise to all kinds of stuff, and the easy money kept going and kept going, and all this money needed to find a place to go, and then money-printing went hog-wild in 2020 and 2021. And the stuff it gave rise to just got bigger and bigger, and crazier and crazier. And much of this stuff is now in the process of coming apart, I mean falling apart, or getting taken apart in a controlled manner, and some stuff has already imploded in a messy way.  And we’ll get to some of this stuff in a minute.

All this money-printing and interest rate repression finally gave rise to massive consumer price inflation, and now we have a real problem, the worst inflation in 40 years, and way too much money still floating around all over the place with businesses, with consumers, with state and local governments. Which means that this raging inflation has lots of fuel left to burn, and the government is making it worse by handing out hundreds of billions of dollars for all kinds of stimulus spending, from the new EV incentives to $50 billion handed to the richest semiconductor makers.

And some state governments are handing out inflation checks or whatever – in California, households can get up to $1,000. And they’re all spending this money, and thereby throwing fuel on the inflation fire. We’ve already seen automakers raise prices of their EVs to eat up the EV incentives, and there we go, more inflation.

The poor Federal Reserve has to deal with all this, and it’s out there raising interest rates far more than anyone expected a year ago, and it’s doing quantitative tightening, and it’s saying all kinds of hawkish things, but the markets are blowing it off, and they’re not taking it seriously, which means that the cold water the Fed wants to throw on financial conditions, and therefore on inflationary pressures, isn’t getting there, and it has to throw a lot more cold water on it, so higher rates for longer, and maybe for a very long time.

Last time we had this kind of inflation, it took over a decade to calm it down, and interest rates went a lot lot higher than they’re today. I have the feeling that this raging inflation today will dish up lots of nasty surprises, which is what raging inflation does.

So now we got all the stuff that money-printing and interest rate repression gave rise to, and this stuff must have continued money-printing and interest-rate repression to exist, but now we have soaring interest rates and the opposite of money-printing: quantitative tightening.

Perhaps the most spectacular creation of the money-printing era is crypto. It started with bitcoin in early 2009, just after the Fed’s money-printing got started. And the promoters fanned out all over the social media and everywhere and touted it as an alternative to the dollar and to fiat currency in general and to what not, and people started hyping it, and promoting it, and they’re trading it, and the price shot higher.

And then come the copycats since anyone can issue a crypto currency. Suddenly there were a dozen of them, and then there were 100 of them then a 1,000, and suddenly 10,000 cryptos, and now there are over 22,000 cryptos, and everyone and their dog is creating them, and trading them, and lending them, and using them as collateral, and all kinds of businesses sprang up around this scheme, crypto miners, crypto exchanges, crypto lending platforms, and some of them went public via IPO or via merger with a SPAC.

And the market capitalization of these cryptos reached $3 trillion, trillion with a T, about a year ago, and then when the Fed started raising its interest rates and started doing QT, the whole thing just blows up. Companies go like POOF, and the money is gone, and whatever is left is stuck in bankruptcy courts globally possibly for years. Cryptos themselves have imploded. Many have gone to essentially zero and have been abandoned for dead. The granddaddy, bitcoin, has plunged by something like 73% from the peak. The whole crypto market is also down about 73%.

Crypto was one of the places where liquidity from money-printing went to, and now that the liquidity is being drained ever so slowly, the whole space started to collapse.

Another thing that came about during the era of money printing was an immense stock market mania, and when the money printing went hog-wild starting in March 2020, the stock market mania went hog wild with it.

We at Wolf Street tracked a bunch of these stocks, crazy IPO stocks and stocks that went public via merger with a SPAC over the past few years, and they shot higher and they spiked on a wing and a prayer with nothing there, companies that were losing tons of money, that didn’t have a business model, that didn’t have anything, and they were suddenly worth $10 billion or $30 billion or whatever.

It was all driven by what I call consensual hallucination and the effects of money-printing and interest rate repression. Those were the fundamentals.

But then in February 2021, when inflation started to heat up, causing the Fed to brush it off, well that February 2021 was when that craziness peaked, and many of these stocks then collapsed by 70% or 80% and over 90%. We tracked over 1,000 stocks traded in the US that have imploded by 80% or more from their highs within the past couple of years.

But other stocks too – big stocks of real companies with real incomes – got inflated over the money-printing years to ridiculous levels, and they’re heading south, a bunch of them have plunged by 50% or 60% from their money-printing highs, including Amazon, Tesla, Meta the former Facebook, chipmaker Nvidia, and many others.

The Nasdaq composite index has plunged by 34% from its high in November last year, the S&P 500 index has dropped 20% from its high at the beginning of this year. If it weren’t for energy and healthcare, the S&P 500 index would look a lot bloodier.

This incredible spike in stock prices that we saw in 2020 and 2021, on top of the huge surge from 2009 was fueled by money printing and interest rate repression. And now we have QT and surging interest rates, and the whole circus is coming apart. Lots of these startups that became highfliers will end up in bankruptcy. Some already have.

But it will drag out for a few years because there is still so much money floating around, and people are still dip-buying, and they’re still picking up these now penny stocks to try to make 100% in three days or whatever, it’s just like crypto trading.

Then there’s real estate. Housing. We had a ridiculous bubble during the money-printing and interest rate repression era. In some markets, home prices spiked in two years by 50%, 60%, and more, on top of the already huge price surge before the pandemic. The whole world went nuts. Consensual hallucination everywhere.

But it’s over too. Mortgage rates are over 6%. Which doesn’t go with these ridiculous prices, and there are other factors.

In San Francisco, for example, one of the formerly hottest and most expensive housing markets in the US, house prices peaked in March this year at over $2 million median price for a single-family house. Then prices began plunging. In November, the median price was down by 21% compared to a year ago, and down by 27% from the peak in May. That’s a huge drop in a short time.

This is a horrible-looking chart. Seasonally the lowest months are generally December or January. But then during the spring buying season, who’s going to buy these houses, amid all the layoffs now hitting the Tech and social media industry? I don’t know either.

In San Mateo County, which comprises the northern portion of Silicon Valley, home prices have plunged by 26% from the peak in April. In Santa Clara County, which comprises the southern portion of Silicon Valley, home prices have plunged by 19% from the peak. They’re down year-over-year in all of them.  In the San Francisco Bay Area overall, prices are down 20% from the peak in April.

Other cities have similar stories. There has been a sea-change in the real estate market. And it’s not pretty. But the bubble was so huge, and so magnificent, fueled by money-printing and interest rate repression, that the deflation of this bubble must by definition get messy.

Money printing and interest rate repression have spent 13 years inflating asset prices, feeding consensual hallucination, and bringing about the biggest scams, such as the entire crypto space, before consumer price inflation finally exploded.

Then there is something else, a little further afield but with direct impact on asset prices in the US.

The Swiss National Bank is trying to keep the Swiss franc within an exchange-rate band primarily against the euro and the US dollar, but other currencies too. When the money printing started inflating everything, some of the dollar-liquidity and euro-liquidity went into Swiss francs.

This was a huge trade in 2010 and 2011. People were buying francs because they wanted to get rid of dollars and euros because of all the money-printing. At the time, the Swiss National Bank had a peg on the franc.

But in late 2011, the SNB took off the peg, cut its policy interest rate into the negative – which started the negative interest rate absurdity that then swept over Europe – and it started printing francs but NOT to do QE, but to sell the francs for dollars, euros, and other currencies, and then it used the dollars, euros, and other currencies to buy assets denominated in these currencies.

The SNB doesn’t disclose what it bought, so we don’t know much. But it must disclose its US stock holdings under SEC rules. So we can see in the quarterly SEC filings what the SNB is up to with regards to US stocks.

Over the years, the SNB has become a HUGE hedge fund, buying US stocks hand over fist, over two thousand different stocks, with the biggest US stocks being its top positions, Apple, Microsoft, Amazon, Alphabet, etc. But in the second and third quarters this year, it started dumping shares, from Apple on down, and it reduced its stock holdings.

You can get the details on Wolf Street. I list the SNB’s top 50 positions and the number of shares, and how they changed this year, and you can see how many shares of Apple it sold, etc. I did this in an article titled, The Swiss National Bank Began Unloading its Biggest US Stock Holdings, incl. Apple, Microsoft, Amazon, Alphabet, Meta.

So what the SNB has done is a dual craziness:

One, it instituted negative interest rates. And two, it instituted a unique racket: printing francs to buy foreign-currency denominated securities, including US stocks. But this was only possible under money-printing and interest rate repression in the US and the Eurozone, which created massive demand for francs, just like it created demand for cryptos and all this other stuff.

But now, there is QT in the US and the Eurozone, and interest rates are rising, and inflation is raging, and asset prices are sagging, and so the SNB has been taking massive losses on its stock holdings, and has started to sell stocks, and it starting hiking its own interest rates, which are now positive.

What the SNB did in those years was something close to doing QE in the US and Europe by using its own printed money to buy those dollar and euro assets. And now it’s unwinding some of those dollar and euro holdings, and it’s thereby doing its own form of quasi-QT in the US and Europe – including in the US stock market.

This whole racket was one of the craziest things out there, when you think about it, but it was enabled by the huge demand for francs, coming from dollar and euro liquidity that was looking for a place to go, and some went into cryptos, and some into US stocks, and bonds, and some went into real estate, and some went into Swiss francs, which the SNB then created, and sold for dollars and euros, and then used the proceeds to buy US stocks and other assets with.

There’s other crazy stuff that came out of the money-printing and interest rate repression era. And all of them are now coming apart, some slowly like the racket by the Swiss National Bank, and some more rapidly, and some have already imploded like a thousand US stocks and a gazillion cryptos and crypto companies.

These 13 years of free money have turned out to be very costly afterwards, as we can now see. But on the positive side, this process provides a much-needed clean-up of the mind-boggling messes created by free money.

Guest post by Wolf Richter from WolfStreet.com.

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