The root of the correction here is a rotation out of tech sector due to the adjusted discount rate from future raising rates and P/E ratio readjustments due to these rise. Is it a more global problem from people at risk to lose their jobs, their homes and default on their payments from a more complex consequence of inflation significantly reducing buying power in the next years. What is the projection of the extent of the impact of raising rates and inflation on possible payment defaulting and subsequent big banks defaulting?
(NOTE: I wrote this over the weekend and forgot to hit "Post Reply". So somewhat dated, but I think still applicable.
This is the multi-million $$ question (whether C$ or US$
).
With all the reporting about a sector rotation I have little doubt that there IS a sector rotation. I imagine it even explains part of what is going on.
What I'm thinking about (fear is probably a bit strong) is that we've had 2 years of the Federal Reserve buying $120B worth of bonds every month. With such a strong buying presence this has been propping up prices in the bond market and injecting a huge amount of incremental cash / liquidity into the overall market. Something like $2.5T (24 months, $120B each month). That money has sloshed around and, as I understand it, mostly stayed in the market - it hasn't gone into people's pockets except for those that are actively invested in the markets.
There have also been multi-trillion $ stimulus in the form of payments (expanded and extended unemployment has been a big one, but not the only) to help individuals and businesses weather this storm. The stimulus payments won't be getting paid back but they do add to the massive amount of money that has been added to the economy to help the economy and households do so well through this period.
As an aside - I do subscribe to Modern Monetary Theory, but I also see it being badly misinterpreted. In some cases I think intentionally as the easy (and wrong) interpretation is that the US Federal Government, as the issuer of its own currency, is able to issue as much currency as it chooses, and thus it can never run out of money or go bankrupt. While this is true it also skips over the bit that is critical - subject to the inflation constraint. The fact that inflation has stayed so low through all of this stimulus and before tells me that we didn't have enough money in the system, but that's a conversation for another time.
The tapering on the bond buying means that the Federal Reserve has begun slowing the rate at which new money is being created (through buying bonds). The upcoming increase in interest rates will start raising the price of money (borrowing rate) making bonds more desirable to purchase (they pay more interest than previously). Between less money being added, and more money going into bonds, the remaining money to use to bid up stock prices will have a bit of a crimp in it.
Then some are interpreting the taper to mean the Fed is going to start removing that ~$2.5T worth of bonds from the market by selling them off to private buyers. I haven't seen the Fed see that - only reports that I believe don't really understand. Or maybe its me that doesn't really understand . My expectation is that the Fed won't sell a single one of those bonds. Instead they will be held until the naturally roll off (expire) and won't be replaced. That will still be an effective sale but it won't show up on a ticker anywhere - it'll show up as companies having a more difficult time rolling over that borrowed money and being dependent on the private markets showing up with new money to be borrowed. And that will stretch the process over years while also making it mostly invisible to individual traders (much less the journalists that cover the markets).
The more immediate, identifiable, and easily explained dynamic in this is a PE adjustment. I don't see a global risk of people losing their homes the way we had in 08. I do see people losing homes and apartments due to being unable to pay bills. And small landlords unable to make their own mortgage payments due to inability to collect rent from people that can't afford it. This is part of the larger dynamic I am referring to when I say the real economy vs. the stock market. Restaurants that have reopened but are fine with 1 server per shift instead of 2 - stuff like that.
