Long financial cycle

This cheap money continued to flow and essentially prompted more investment into the stock market as bonds, a typical safe haven, simply did not have enough yield. With this investment into the stock market came investment into venture capital, thus spurring new tech companies to launch and expand. This created a rush to the area, and the commensurate trouble with housing prices and congestion at a time when governments were still getting their feet under them after the financial crisis and had a limited ability to handle the influx.

Trump’s tax cuts essentially added jet fuel to a fire no one wanted to put out, and the Coronavirus Aid, Relief, and Economic Security Act; the Consolidated Appropriations Act; and the American Rescue Plan, along with the Infrastructure Investment and Jobs Act of 2020 directed $6.2 trillion in new spending.

That new spending, combined with the money printed for previous bond buying, with the addition of supply chain problems spurred by all sorts of things but mainly COVID, means we have significantly higher inflation. And no one needs to know what that means, but it does mean our money doesn’t go as far. So, that raise you got last year? Doesn’t even cover rising costs.

It also means we turn to a mechanism used to temper inflation and that is rising interest rates. While rates peaked in 2006 at over 5% (remember that savers?), it dropped to near zero during the financial crisis and stayed there until 2015, when it started climbing again slowly to around 2.5% before the pandemic, then it dropped quickly to near zero to help the economy in the last two years. Now, it’s set to move up again, and the Federal Reserve is slated to stop its bond buying sooner rather than later. This means bond yields will rise, and all that high-flying tech money made in the stock market will soon find a home in safer bonds.

So where does that leave the middle class, with IRAs and small portfolios? Or market newcomers looking for the next big meme stock? Looking at a sea of red for the past few weeks wondering where all the profit went. This is a natural market cycle, and many argue we are due for a significant drop. In January 2002, the Dow Jones Industrial Average was at 15,614. The exact point 10 years later it was at 15,538, with some higher moves, followed by a huge drop in 2008, then a slow climb out. On Thursday, it closed at 34,160 — more than double what it was 10 years prior. Many of the rises of individual stocks were based on speculation, and their drop makes a ton of sense, but there was also a significant amount of what former Fed Chair Alan Greenspan once called, “irrational exuberance.”

It’s not necessarily time to be bearish on the U.S. economy, but these are extremely unusual times with a series of highly unusual measures that seemed at risk of becoming more permanent than temporary. It’s healthy to remove artificial stimulants from our economy and focus more on the fundamentals of relative strength. After all, that’s what truly builds an economy — not investment in low-profit companies that benefits from the ersatz frenzy created in chatrooms or tokens that are pastiche. Meme stocks and nonfungible tokens are the new tulip bulb mania. While that’s one of the strangest sentences I’ve written, if you know anything about Dutch markets in the 1600s, it makes absolute sense.

All cycles come to a close, and it’s time to put this one to rest.

Jon Mays is the editor in chief of the Daily Journal. He can be reached at jon@smdailyjournal.com. Follow Jon on Twitter @jonmays.