Rising prices are hitting American wallets to a degree we have not seen in more than four decades. In fact, over the past 12 months, consumer prices have risen 41.6% for energy, 10.0% for food and beverages, 9.7% for autos, 5.6% for shelter, and 5.2% for apparel. If we expand our analysis to 18 months, consumer prices as a group have risen a whopping 13.8%. Even more troubling is the fact that producer prices—which can serve as a leading indicator for consumer prices—had an even larger increase of 18.0%. As a result, we are likely to see prices continue to rise over the months to come.
Fed removes stimulus.
The U.S. Federal Reserve has been given a dual mandate, pursuing the economic goals of maximum employment and price stability. Not only are prices unstable, the tremendous amount of stimulus deployed by the Federal Reserve—in response to both the financial crisis of 2008, and the COVID crisis of 2020—have contributed to the current inflation problem. In Chair Powell's own words, "We at the Fed understand the hardship that high inflation is causing. We are strongly committed to bringing inflation back down, and we're moving expeditiously to do so." The Federal Reserve has increased short-term interest rates three times thus far in 2022 from roughly zero to 1.5%. In addition, the Federal Reserve has begun to slowly shrink its $9 trillion balance sheet by $47.5 billion per month, with the intention of accelerating that to $95 billion per month later in the year.
Difficult first half of 2022.
Domestic stock prices accelerated through the end of 2021. Since that time, inflation pressures have increased, war broke out in Ukraine, economic sanctions were imposed on Russia, China had numerous COVID setbacks, supply chains remained under pressure, and central banks around the world began tightening monetary policy. When combined with stretched valuations, it is no surprise that the S&P 500 index experienced its worst first half since 1962. With the exception of commodities, risky assets were down across the board with many categories at or near 20% losses.
In addition to stocks, bonds also suffered during the first half of the year. Losses ranged from -5.3% for short-term bonds to -21.0% for long-term bonds. While most investment textbooks—and even passages on the SEC's website—remind investors that when interest rates rise, bond prices fall, negative bond returns were a shock to many investors. Since the early 1980s interest rates have been on a downward trend. In fact, the yield on a 10-year treasury bond fell from 15.8% in September of 1981 to just 1.5% at year-end 2021. With the 10-year treasury bond interest rate nearly doubling over the past few months, investors who avoided longer-term bonds and focused on short-term bonds in the first half of 2022 are in a much better position today than those who chose otherwise.
Between November 2020 and November 2021, Bitcoin rose from less than $14,000 to over $68,000 per token, with some investors utilizing huge amounts of leverage in an unregulated industry along the way. From there, things began to unravel a bit.
- In Mid November 2021, cryptocurrencies began to decline along with other pricey assets, such as technology stocks. By year-end, Bitcoin had fallen more than 30% to just under $48,000
- In early 2022, cryptocurrencies traded with increased volatility but were little changed by the end of March.
- Things change on April 4, when the Security and Exchange Commission announced, that it would begin regulating crypto platforms, setting the stage for a broad sell-off.
- Also on April 4, the BitMEX cryptocurrency exchange laid off a quarter of its staff after a failed acquisition.
- On May 10, Coinbase—the U.S.'s largest cryptocurrency exchange—reported a quarterly loss of $430 million, a 19% drop in users, and that in the event of a bankruptcy, its users might lose all the cryptocurrency stored in their accounts.
- On June 12, the cryptocurrency exchange Celsius Network announced the half of all withdrawals and transfers.
- On June 13, Tron's algorithmic stablecoin USDD lost its peg to the US dollar.
- On June 17, Hong Kong crypto lender Babel Finance froze withdrawals.
- On June 23, CoinFlex paused withdrawals after a counterparty failed to repay a $47 million margin call.
- On June 29, the cryptocurrency hedge fund Three Arrows Capital declared bankruptcy.
- On June 30, the Canadian cryptocurrency lender Voyager halted all transactions.
This publication contains general information that is not suitable for everyone. All material presented is compiled from sources believed to be reliable. Accuracy, however, cannot be guaranteed. Further, the information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this publication will come to pass. Past performance may not be indicative of future results. All investments contain risk and may lose value. © June 2022 JSG
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