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The FRED Index of Equity-Related Economic Uncertainty hit its sixth-highest reading on record today, as liquidity continues to dry up for risky assets. The peaks of this index generally coincide with periods of significant declines in the S&P 500 index.
As inflation hit 40-year highs in the U.S. (as well as high readings in the rest of the world), investment-grade bonds essentially ceased to exist with nominal yields well below the US dollar rate. inflation without taking credit risk (default) into account. .
We continued to argue in The Deep Dive that bitcoin’s monetary competition is not just gold, but rather the monetary premium that has nestled itself into global bond markets and even stock markets amid the bubble. all.
The bubble of everything
We continue to use the term “all bubble” in The Deep Dive to frame the state of the international monetary system, but what do we mean?
The Federal Reserve Board and its actions as a “lender of last resort” for the US dollar (the dollar serving as the world’s reserve currency) acted as a volatility suppressor for decades.
Starting notably with Alan Greenspan and the “Greenspan put” (later known as the Fed put), financial markets learned that the Fed would save the day by bailing out credit markets and keeping money easy to circulate. . Now, in 2022, with the Fed funds rate still at the lower bound of zero, the Fed has become a political liability and is caught off guard trying to tighten as liquidity in financial markets recedes.
In The daily dive #142 we discussed the implications of the current credit market sell-off:
“The consequences of falling debt prices are higher financing costs across the economy as a forty-year high in the consumer price index as well as a board of the Mildly hawkish Federal Reserve is pushing lenders to seek higher yields.
“What needs to be watched going forward is how credit markets are trading, because that has a direct impact on equity markets from a corporate finance perspective, but also from a financial perspective. view of market valuation.
“This is something we will be watching very closely over the next few months, in a potential Fed rate hike cycle.”