Our Guide to the Engineered Market Sell-Off of 2022

We’ve all felt the volatility in the markets recently.

And it all centers around the Fed. Fears of rate hikes started rattling stocks all the way back to the end of last year.

Now, in the new year, uncertainty has clobbered stocks and cryptocurrencies. Headlines are now squarely focused on inflation and interest rates.

You see, the Fed needs to effect change without causing damage in the process. And it walks a razor-thin tightrope. If it teeters too conservative, it could drive us into a recession. If it teeters too liberal, it could cause hyperinflation.

That’s why individual investors… companies… and investment firms are paying such close attention to its every move right now.

But I think there’s more to this story than what we’re getting from the mainstream media.

I think the Fed has begun to cool the economy without us even knowing it.

Today, I’m going to explain why I suspect that much of the current panic is engineered… and what that really means for all our portfolios going forward.

How We Got Here

First, let’s review how we got here in the first place.

The Fed has issued easy monetary policy since the Great Financial Crisis. Going back to the TARP (Troubled Asset Relief Plan) bailout, the Fed has been implementing some of its heavy weaponry.

This approach got amplified in February 2020.

World leaders began advising the public to stay home and protect ourselves from a novel, extremely contagious virus. If we caught it, we could die. The age of COVID-19 began.

Yet if the workforce was at home and the economy was frozen, we could spiral into a recession… if not an outright depression.

The Fed had to act to keep our economy afloat.

The stimulus was unleashed alongside aid, Economic Injury Disaster Loans (EIDLs), payroll protection, and unemployment insurance.

And, of course, the Fed dropped interest rates effectively to zero.

In response, stocks rallied from their depths and went on to new highs… all while we were staying home. Robinhood reported tons of $600 and $1,200 deposits, matching the amounts of stimulus checks. Speculative markets especially benefited from the government-sponsored stimulus. Likewise, crypto soared.

In other words, people stayed home and bought riskier assets.

Leverage grew in the system too. When rates are low and money is plentiful, then assets tend to go up and stock markets do well. And hedge funds and traders who want to beat the market often use leverage to do so.

Yet for much of 2020, people weren’t working. Factories were shut down. Trucking lines slimmed dramatically. Supplies chains crunched. And we’re still feeling the effects today.

Here’s a simple equation:

• 1 – When supplies are low and demand is high, prices go up.

• 2 – When there are oodles of cash in the system, asset prices go up.

• 1+2 = 3 – When oodles of cash chase short supply, prices go way up.

That’s where we are now: 7% inflation.

A Tough Problem to Solve

Inflation at 7%, of course, is a problem.

Suddenly, everyone’s paychecks don’t stretch as far as they once did. And with the 10-year Treasury bond yield hovering at a mere 1.8% right now, there simply aren’t many safe places to park our money without it getting eaten up by inflation’s invisible tax.

So how do we fix it?

The simple answer is that the Fed must tighten the money supply by raising rates.

And that is partially right.

The problem is this: The U.S. has issued so much debt and expanded the balance sheet so much, that the Fed must be very careful how it raises rates.

Raise them too much, and the interest alone on our country’s debt would become crippling. Too high rates could also cause a recession.

But raise them too little, and inflation rages on.

That’s left the Fed with a dilemma.

The Solution Hidden in Panic

The way to fight inflation is to take money out of the system and reduce the price of assets. If the Fed can’t raise rates too high, though, what can it do?

That brings us to our current state of affairs… Taper Tantrum 2.0.

Back in December, the Fed released its December meeting notes and indicated it might need to accelerate the tightening of the money supply.

Nothing had actually happened yet, but the mere mention of tightening on a quicker schedule spooked stocks and crypto.

Just indicating that monetary tightening would likely happen at some point in the future was enough to shake the markets. Investors slowed buying stocks and cryptos because they didn’t know exactly what the Fed would do or when.

The uncertainty sown by the Fed was enough to slow the ever-persistent bid for stocks.

And it’s gotten a helping hand from investment firms too.

Last week, Goldman Sachs called for four rate hikes in 2022. This week, it upped its estimate to five or more. JPMorgan’s CEO Jamie Dimon said we could expect wicked volatility through summer, and “if we’re lucky,” the Fed would engineer a soft landing.

These statements made headlines and shook investor confidence even more.

With fewer buyers bidding prices up, stocks sink. And when there’s no-bid, algorithmic traders and short-sellers step in and try to force stocks down. As cracks appear, selling begins to cascade. Cryptos stall and fall too.

Now asset prices are falling. People look at their brokerages, 401(k)s, and crypto accounts and see red. They are falling fast. Net worths are shrinking.

When this happens, people think twice about spending.

“Maybe we don’t need that vacation.”

“Maybe I can wait to buy that new TV.”

Suddenly, the buying pressure inflating prices gets softer. Inflation starts to cool. The money supply has been reduced.

And guess what? The Fed hasn’t had to do a rate hike yet.

The risk-off selling has the bonus effect of removing some leverage out of the system too. Investors who levered up are suddenly faced with sharp declines. Margin calls come… which causes more selling.

Is the Timing a Coincidence?

This bubble-prick comes at a curious time too: Omicron cases have peaked. Hospitalizations are going down. The government has largely turned off aid and benefits.

That didn’t matter so much when traders could make good income punting meme stocks and cryptocurrencies. But now they’ve tanked.

Guess what: people will have to get jobs. Where else will they get their money from?

As the labor force shores up and the threat of the virus wanes, we’ll also start to thaw our supply issues. The supply chain crunch will ease over time. That will also cause prices to fall more.

So that leaves us to the current raging debate about what the Fed will do from here.

Remember, Goldman expects five hikes. Dimon expects a soft landing if we’re lucky.

Yet consider who was in charge of TARP during the global financial crisis – Hank Paulson. Paulson was a Goldman Sachs CEO before he left to become Treasury Secretary.

And JPMorgan? It bailed out the U.S. government in 1893 and the U.S. economy in 1907. JPMorgan essentially was the Fed before there even was a Fed.

Is it hard to believe these institutions now might act as agents to spread the Fed’s message to overzealous investors to cool their speculative ways?

All that’s left is for the Fed to cautiously monitor and enact slow rate hikes to keep things in check.

But let me assure you…

The Fed will not raise rates five times, or even four times. In fact, the Minnesota Fed chair is on record expecting only two hikes this year.

As such, the Fed’s soft-landing is nearly guaranteed.

Why We Shouldn’t Worry About Stocks

So despite the recent red in the markets, we shouldn’t worry about stocks.

Earnings season is here, and as companies’ numbers come out largely stronger than expected, it should help to calm this volatility a bit. We may not immediately go back to highs, but it will quell the slide.

Companies are doing phenomenally well. They should continue to do so. And stocks have weathered far, far worse than fears over tighter rates.

Likewise, in time, the market will digest the Fed’s less aggressive action and resume an upward trend. Headlines will finally be able to talk about other things.

That’s why we shouldn’t panic or get depressed about the recent market action. Buyers now will find stocks at a discount and enjoy the payoff for years to come.

In fact, right now, I’m helping my readers locate the best discounts around. If you’d like a helping hand to navigate these turbulent markets, then please check out my Outlier Investor service.

I use real data and algorithms to explain what’s going on behind the scenes… and track exactly where the biggest opportunities are… You can learn more right here.

Talk soon,

Jason Bodner
Editor, Outlier Investor

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