The era of super-cheap money is now coming to an end

The speculative darlings of the easy money era — tech stocks and cryptocurrencies — are especially vulnerable now that the Federal Reserve is cutting its balance sheet by nearly $9 trillion.

At the same time, central banks from Canada to Europe are set to test the resilience of global markets as they follow hawkish US policymakers on a mission to cut liquidity to reverse the pandemic bond-buying boom.

That’s the general outlook for Wall Street and beyond, according to the most popular responses from 687 participants in the latest MLIV Pulse poll, as the Fed begins cutting its holdings this month in a process known as quantitative tightening.

The historical shift is seen as a notable threat to technology stocks and digital tokens, risk-sensitive assets that skyrocketed during the Covid-era market mania before crashing in this year’s asset crash.

The era of super-cheap money is now over. The Fed’s balance sheet drawdown has been in place for more than a year, while almost two-thirds of respondents say the four-decade-long rise in Treasury bond prices has come to an end.

All of this comes against the risky backdrop of raising interest rates at the fastest pace in decades by the Fed to fight hot inflation as officials try to dismiss talk of a September break.


Recent swings in equity, bond and other markets have done little to deter the US central bank from its hawkish stance, as many policymakers expected another half-point rate hike on June 15. This month, the Fed began cutting its balance sheet, allowing maturing assets to go unreinvested at a monthly rate of $47.5 billion, rising to $95 billion a month in September.

“It is where this amount of capital and amount of liquidity has been most beneficial that the outflow will continue to be felt – and that is in the most speculative parts of the market,” Lisa Shalette, chief investment officer at Morgan Stanley Wealth Management. It is reported by Bloomberg Television.

The MLIV survey of the most risky assets in the QT era included a group ranging from retail investors to market strategists. Just 7% chose mortgage-backed bonds — the securities that caused the 2008-2009 crisis — with nearly half citing technology and cryptocurrencies.

The outflow of money from the system leads to a tightening of financial conditions, all other things being equal, which acts as a brake on economic growth. This could lower the valuation of tech stocks given their reliance on optimism about future earnings.

The Fed’s bond buying halt also forces the Treasury to sell more debt on the open market, potentially putting upward pressure on bond yields, which play a big role in how Wall Street values ​​listed companies — a holding wind for so-called growth. shares in particular.

Thanks to policy easing in the pandemic era, the high-tech Nasdaq 100 is up more than 130% from its March 2020 low before falling this year.

Meanwhile, cryptocurrencies are increasingly dependent on fluctuations in technology stocks. Since March 2020, there has been a strong positive correlation between Bitcoin and the Nasdaq 100, which has intensified with this year’s sell-off.

It is believed that when money is cheap, traders can massively speculate on future digital trends. But when the lot of liquidity wanes, those bets become more costly.

“I don’t think people fully appreciate how strong QE has caused investors to add a lot of leverage to their positions,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Now that we’re going through QT, that lever needs to be spun.”

Respondents who were active in the market during the financial crisis more than a decade ago are particularly concerned that the Fed’s balance sheet cut will hurt junk bonds. New entrants are more likely to worry about its impact on crypto and tech stocks.

Readers in general are sounding the alarm about world trade conditions as institutions such as the European Central Bank, which is in session this week, and the Bank of England seek to curb their expanded balance sheets. Nearly 53% said they are concerned that markets are underestimating the importance of central bank liquidity outside the US.

Only 8% described QT as a whole as over-hyped. However, the main concern for MLIV readers remains how much the US central bank will raise the underlying cost of borrowing this cycle. About 61% said the level at which the federal funds interest rate peaks is more important than the amount by which the balance sheet is reduced.

As for the end of the QT game, about two-thirds say the main catalyst is likely to be negative events rather than a win on the inflation front. About 38% said that economic problems would put an end to balance sheet shrinkage, while 20% pointed to market turmoil.

Only 10% voted for problems related to bank reserves and short-term funding markets. This is an implicit vote of confidence in the measures the Fed took to prevent the financial system congestion that it intervened in 2019 during its previous tightening program.

For many, the era of ultra-low rates and large central bank balance sheets is all they knew professionally. About 46% of MLIV respondents were not active in the markets prior to the widespread global adoption of quantitative easing after 2008.

Even fewer participants have taken advantage of the early longtime bull market in Treasury bonds in recent decades. The vast majority of readers – 64% – say that the 40-year bull run is finally over, and experienced market players are noticeably more belligerent than their younger counterparts.

“Whenever you see major shifts in liquidity, there is a chance that you may see some market disruptions that could trigger aggressive trading behavior,” said Ed Moya, senior market analyst at Oanda.


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