Largest Market Capitalization Drawdown in 91 Years
The year 2022 is turning out to be the worst financial year since 1931. There are still two more highly likely interest rate hikes this year and more market losses ahead. This year could overtake 1931 as the worst market performance in nearly 100 years. The chart to the left (below) is a graph of yearly stock and bond market returns. The X-axis represents stock market returns, and the Y-axis represents bond returns. Only three years since 1926 have shown negative stock and bond returns.
This year has seen more wealth lost than the financial crisis of 2008. The chart to the right (below) shows any market capitalization loss since 2004. Market capitalization represents the total stock and bond market valuations. The worst years have been 2008, 2020, and 2022. In 2008, there was a drawdown of approximately $9 trillion. In 2022, the drawdown is close to $19 trillion. An equivalent number adjusted for inflation would be about $12.41 trillion, meaning the 2022 total market capitalization loss is about 53.10% greater than in 2008.
Why Has 2022 Been So Rough?
History doesn't happen in a vacuum, and the current market situation didn't develop overnight. Multiple factors over the decades have molded the political, economic, and social landscape. However, to simplify it, inflation can explain everything, which is the bill society gets for short-term thinking. Think of inflation like a college kid with no financial education or discipline who gets their first credit card. It is easy to get a pizza or beer anytime. Just give the card, and they give you a pizza. No money is needed. The kid doesn’t think about the bill, just the comfort of pizza and beer daily. If he does think about the bill, it will be in a dismissive and negating way that it won’t be that bad. Life is good until the bill finally comes. When the bill comes, he sees the interest charges and how expensive it is to eat out daily. The world governments have been living like our college kid for decades. Whatever they want, they print money and, like a magic credit card, get their political pizza and beer. The bill showed up, and it is called 2022.
Governments and politicians blame everything for inflation except the primary thing which causes it: government printing. There are two main types of inflation cost-push and demand-pull. Cost-push would be a higher cost of production pushed to the consumer. The cost push is the type of inflation politicians like to blame. In 2022, we have heard that higher oil prices and corporate greed are the primary causes of the record high inflation. These contribute to inflation but on a significantly smaller scale than demand-pull inflation.
The government’s response to more revealing than its rhetoric about why they think there is high inflation. Economists agree that demand-pull is the most common type of inflation. Demand-pull inflation is an increase in demand that strains the supply chain. Economists describe it as "too many dollars are chasing too few goods." The primary drivers are government spending, money supply expansion, and a fast-growing economy. The irony is that, for political reasons, the government overstates the impact of cost-push inflation. However, the Fed uses interest rates and money creation to affect demand-pull inflation.
The government claims that higher oil prices are the primary driver of inflation. How do higher interest rates help the Fed achieve price stability? Higher interest rates could not affect inflation if the inflation resulted from higher oil prices from the “Putin Price Hike” claimed by the administration. Higher interest rates slow down the economy to slow down demand and have “fewer dollars chasing more goods.” Demand destruction is why 2022 has become the worst year since 1931. The Fed is doing it intentionally to counterbalance all the Dollars they printed.
How Does it Fit?
Demand destruction means economic pain, which is precisely what is happening. Higher interest rates make mortgages, auto loans, and debt-based purchases more expensive. People buy less stuff. Businesses need to lower prices to attract customers back into the market. Lower prices mean lower profits. Lower profits and higher costs are a recipe for employment layoffs, destroying more market demand. Most unemployed people don't have the money to spend on unnecessary goods and services. When you put it all together, you are left with a recession, high unemployment, and disaster in the stock and bond markets. Housing contracts, but not as quickly as the paper markets.
Why Precious Metals?
There is an investment axiom, “don’t fight the Fed.” Not fighting the Fed means aligning your investment strategies and portfolio allocations with the assets most likely to flourish because of their policy. There are bargains and winners to be found in the stock and bond markets, but overwhelmingly they are mostly losers right now. When interest rates rise, being too heavy in paper assets is fighting the Fed. Being too heavy in paper right now is standing on the tracks convinced the coming train will miss you. For many people, the thought is to move toward real estate. There may be better strategies than new real estate purchases right now. Real estate prices have started contracting and are down two months. Interest rates are high, and the valuation of housing is inflated. There may be some desirable real estate options several months to years from now, but right now, it looks like housing prices have peaked and are just starting to descend. Exceptions always exist, but buying real estate is fighting the Fed right now.
On the other hand, precious metals are tangible assets with a very low correlation to interest rates. Precious metals are one of the best ways to play defense and protect your purchasing power. Many investors want to be in cash and wait for future market corrections to snag bargains. Buying low is smart. However, cash is the wrong place when inflation destroys purchasing power. There is a dilemma. Cash is the wrong place to be, but I need cash to buy bargains. Instead of sitting in cash, it makes sense to be in cash-equivalent assets like bullion products. If investment gain is the goal, pre-33 and investment coins are viable options in a down economy.
The world may want to buy pizza and beer daily on credit cards. However, if you want a different result than debt and pain, you must do something different. If short-term thinking got us into the mess we call 2022, do you believe long-term thinking get us out of it? Are you thinking long-term?
Call the U.S. Gold Bureau for more information.