🌍 Fed ending QE drains liquidity-dependent assets in 2022

“So I got that part right, but what I didn't connect it to were all the asset classes actually got pummeled.”

“So, it is an absolute worldwide sea change in how we need to think about risk.”

“The point is that you didn't have to do this when rates were zero. There was just an abundance of free money and risk seeking and duration that is now out of the market.”

“But when your interest rate is zero, you divide by zero, you get infinity. So you were able to kind of explain everything away into the future. Now you actually have an interest rate at 5%.”

“which is a redistribution of that value, because we're basically deflating all those assets now. We're going to deflate the stock financial assets and we're going to deflate real estate assets.”

“And I will also say that in the last year, with the liquidity that we saw the last two years, it leached into the stock market where there's supposed to be more rational behavior that ultimately the cash flows of an asset you're buying should generate more for you than the money you're spending to buy that asset.”

“We're in the eighth month of this story, which is fill in the blank asset class crashed.”

“we have not seen an era without federally introduced spending, without federally introduced forms of quantitative easing since the great financial crisis. So we have been propping up our economy for 14 years straight now. So we have distorted the prices of bonds and fixed income. We've distorted the prices of equities. We've we've created an asset bubble in crypto out of nowhere.”

“we need to reset supply and demand by taking $30 trillion out of global markets ... And we're the only one that's doing quantitative tightening right now. The ECB hasn't even started taking all this crazy money out.”

“you saw an increase in speculative investments across the board, including but not limited to crypto. So again, you know, when the Fed prints too much money, it creates asset bubbles.”

“we've said it before that crypto is like a liquidity sponge. It sucks up when there's a lot of excess liquidity. It sucks up that liquidity. But now that sponge is getting wrung out.”

“the reason the stock market went up dollar for dollar was actually tied to the growth in the M2 money supply. The correlation was.92. So for every dollar that the Fed printed, the stock market went up by 92 cents. ... it stands to reason that if the Fed is going to take three to five trillion dollars of value out, then we have to rerate the equity markets by three to five trillion dollars at a minimum.”

“We destroyed 15 trillion of household net worth in the last five months. ... So the Fed has done exactly what it wanted to do. It ruined all the SPACs. It ruined everything. It took all the juice.”

“we basically had a mini pullback in March of 2020, but then the Fed hit so hard that things just blasted off again. ... Now, you guys have talked about this, but that tool is not in toolbox anymore.”

“this is the problem with the Fed and the administration and Congress basically flooding the zone with all this fake money is that it distorts all the signals in the economy.”

“the process of quantitative tightening, which is the Fed's mechanism of removing liquidity, is going to start now to the tune of about $90 billion a month, but to run off all the money that they printed will still take three years”

“And so, when interest rates got hiked, it was like, all that money is coming back out of the system. And it was like this whooshing sound, like the airlock got opened, and all the cash came back out. And as a result, the bubble is just all deflated.”

“they have really magnified this because you had the Fed for years maintain interest rates really too low and doing quantitative easing during a boom. And then the federal government was printing trillions and trillions of dollars, and they didn't stop. ... But then last year they printed that last two trillion, and that's what set off this wave of inflation.”

“Now the problem is what that does is that removes liquidity from the market. ... And when you remove liquidity from a market, you actually make it a little bit more fragile, a little bit more precarious, a little bit more price sensitive. ... And so it puts us in a very tough situation when the economy is slowing, when these guys may be raising rates, and then at the same time removing money from the system, it may be a lot for all of us to handle.”

“we're going to move by 50 basis point increments for the foreseeable two or three rate hikes, and we're going to start quantitative tightening ... what they're going to do is about $95 billion a month of the opposite action, which means they're taking money out of the system ... you probably are going to see them, you know, even ratchet up quantitative tightening until there is a bit of a bloodletting in the equity market. They need to see that the markets crack.”

“By the way, that's what caused a lot of the problems is we flooded the zone with liquidity. Now, we're trying to mop that up with interest rate increases, that's slowing down the economy. ... And this is the classic hangover after the party. They put the punch bowl out for way too long, and now we're all going to pay the price for it.”

“the number one question I get from GPs, venture capitalists and others right now is when are we going to bounce back? Let me be absolutely clear. There is no bouncing back to where we were the last 18 months. That was the outlier. That was the make-believe.”

“If you look at, you know, during the two-year period during COVID, the multiples had risen to some insane level, right? And because of all the liquidity that had been pumped into the system. So as soon as you saw the charts that way, you could just see where things were headed, which is back to historical averages.”

“if these shocks are really, really, really meaningful globally, I think you're going to see the Federal Reserve and the ECB and the Bank of Canada and the Bank of Japan step in in a very coordinated way to provide liquidity to these markets.”

“they're assuming that under the conditions of great uncertainty like this, the Fed cannot act as aggressively as they were planning to act ... it would continue to kind of keep prices somewhat inflated and continue to support the market with cheaper capital and liquidity”

“we have to remember that, you know, the Fed has nine trillion dollars of assets on their balance sheet. And so, you know, if they start to take nine trillion dollars of cash out of the system by selling these assets into the market, right, you're taking the money out, right, because you're getting money back. That's going to have an enormous, huge impact as well.”

“the reality is, over the last couple of years, we've had trillions of dollars that have flowed into these markets for free. And those trillions of dollars have created lots of mini asset bubbles. ... And regardless, the money is coming out of the markets. The money is going to come out one way or another. And as it starts to come out, these little bubbles are the first that are going to pop.”

“you're right that we pumped in $10 trillion, but over the last three weeks, and really over the last two and a half months, we have actually eviscerated $10 trillion of value as well. So if you want to measure it, we put $10 trillion of excess capital in, but we've now destroyed $10 trillion of equity.”

“you had the Fed and the federal government pump a 10 trillion of liquidity into the market over the past two years because of Covid. Now they're starting to pull that back. And there was, I think, a general asset inflation across asset classes. Certain types of assets clearly got more inflated than others.”

“we're in the midst of a giant re-rating because we're realizing that so much of the peak values we were seeing in 2020 and 21 were the result of artificial liquidity. ... I guess my big prediction for business losers this year were asset classes that were highly dependent on liquidity. You guys predicted crypto would be one of those. Clearly, it's taken a massive hit.”

“In 2022, the Fed is going to stop quantitative easing... the losers are going to be any of these asset classes that are heavily dependent on all this excess liquidity... everything from sports cards and collectibles to art, to crypto, to maybe some growth stocks... markets that have to get off drugs basically.”