Down here on Main Street we get a chuckle out of some people’s reactions to the obvious. What seems like common sense to us is greeted with dismay, denial and even wailing and the gnashing of teeth by those who think it could never happen to them. The political and financial elites want to do all the dancing and then leave us to pay the piper. Well, we have been chipping in our share for a while, but now that their turn has come the howling on Wall Street can be heard clear down here on Main Street.
During the free-money era inaugurated by quantitative easing, zero bound interest rates and profligate Federal spending, the population of Wall Street grew by leaps and bounds. Universities pumped out bankers, brokers and MBAs by the boatload to help mop up all that excess liquidity and empty the buckets where they belonged: in the financial industry’s sink. Only that sink turned out to be a toilet and now that the Fed has pulled the handle all the hedge funds, venture capital firms, trading desks and investment banks are discovering that they have too many minions soaking up too few dollars.
Some of those recent college grads were taught economic principles that paid attention to supply and demand, the importance of productivity, how to read a balance sheet instead of a story, and all the other practical facets of Capitalism that have been learned the hard way by the minds of the past. But some of them were indoctrinated with Modern Monetary Theory, Socialist mumbo jumbo and a belief that technology and enlightened central banking had somehow changed the basic precepts, that they had removed the limits to growth and that “This time it’s different”.
A great deal has been made of the layoffs rippling through the tech sector now that money isn’t free anymore (well, it never WAS actually free as we are finding out now, but that’s another article). Faced with having to run their businesses profitably instead of growth-at-any-cost using other people’s money, Silicon Valley is shedding unproductive headcount faster than a Malamute sheds fur in the desert. Everyone with more brains than greed should have realized long ago that there are only so many hours in a day that folks can spend with their faces shoved into a cell phone or computer screen and that as the number of CRM’s, apps, social media platforms and games increased, sooner or later the music would stop and there would be a shortage of chairs. For a while this fact was masked by the pandemic shutdown and dwindling productivity numbers but those days are behind us.
The next shoe to drop is almost certainly in the financial industry. I saw an estimate on one of the talking head shows that between stocks, fixed income and bonds $32,000,000,000,000, that’s right, 32 trillion dollars had been erased from portfolios this year. I don’t think that included crypto. The financial network shows bring on “market strategists” and “money managers” many of whom appear to have been born shortly before the 2000 crash which would make them 8-12 years old during the big one, the real estate meltdown of 2008. They tell me that “historically” now is a good time to buy. That may be correct or it may not, although I incline to the latter. None of them seem to notice that no Federal government has ever had a national debt approximating ONE-THIRD OF WORLD GDP, that the Federal Reserve has had to monetize that and now has almost 10% of world GDP on its balance sheet or that the pols just keep on spending. In fact most of the youngsters never even mention the effect of government spending on the economy or the debt markets. The pool of liquidity that fuels the stock market also sustains the debt markets, the two are inextricably linked.
But they need us to buy and that’s for sure. Just as there is a limit to screen time, the less money there is to manage, the fewer managers are required to manage it and the less profit there is to pay salaries and bonuses to the survivors. We and they know who will be left without a seat. It will be all those young new hires, not the crafty old salts that have seen this before and know how and when it is time to hunker down and cover their ample arses.
When Jay Powell said there would be pain the youngsters nodded their heads sagely, but little did they suspect that they would be the ones feeling it. Pain is for us peons down here on Main Street. Surprise! There is plenty to go around. The probabilities are that sometime before bonus season the culling of the herd will begin to leave more scratch for the alpha dogs.
And of course, the fed will be blamed, in fact the chorus has already started warming up. Everyone on Wall Street loved “helicopter money”. No one was complaining when the Fed ran up its balance sheet to nine trillion dollars and paid banks big interest on their excess reserves. Nobody whined when the Federal government dumped piles of stimulus dollars onto the street for anyone to pick up. In fact, the financial manipulators invented new and exciting instruments like crypto and a variety of spacs, leveraged ETF’s and other derivatives to sop up all that liquidity and then paid it back to themselves in fees and bonuses. All this forced the Fed to print too many dollars and now that the piper has put away his magic flute the rats are returning with a vengeance.
The deeper cultural question becomes; “How do those young traders, brokers and bankers react to the end of the gravy train?” They have been spoiled by learning the ropes in an era of easy money and profligate compensation. What will happen when they lose their comfy sinecures and have to work twice as hard for half as much? The same goes for the tech and crypto employees who expected to get rich from stock options that are now so far under water they will never see the light of day even if the underlying company survives, which many won’t. The Federal government has already maxxed the credit card on Covid stimulus and unsustainable spending habits. With the world economy slowing there will be fewer takers for Treasuries to paper over more spending and the previous buyer of last resort is selling, not buying anymore. Gens X, Y and Z are in for a rocky ride and I, for one, am not sure how they will respond.
And the truth of that old saw becomes obvious once again: “There’s no such thing as a free lunch”. Time to pay the bill.