Cheap Money – The Paradigm Shift Hits Wall Street

Cheap Money Wall Street

Market momentum is Red. The financial markets are red today as investors attempt to digest a massive earnings and revenue miss from JPMorgan Chase. Earnings season will hit its stride tomorrow, with multiple banks offering their assessments while investors and traders navigate the primary July expiration for options trades.

Last month, CNBC ran an interesting interview with Morgan Stanley (MS) executive Tom Pick. Pick suggested what I’ve been saying since 2018. That the global markets are experiencing a massive shift in expectations and fundamentals. The 15 years of cheap money, low interest rates, and easy corporate debt were closing. Honestly, it’s been 20 years since the Fed started boosting its balance sheet, but who’s counting. 

“It’s an extraordinary moment; we have our first pandemic in 100 years. We have our first invasion in Europe in 75 years. And we have our first inflation around the world in 40 years,” Pick said. “When you look at the combination, the intersection of the pandemic, of the war, of the inflation, it signals a paradigm shift, the end of 15 years of financial repression and the next era to come.”

It was a sobering statement. No longer could banks rely on cheap debt to help push mergers and acquisitions. No longer should worthless IPOs come to the public markets. Companies would need to stand on their own… and produce profits! Oh… the horror of turning a profit for investors.

This was an open admission of the obvious. For 15 years, stocks climbed, people profited, and cheap money funded all of it. Even in 2002 – when the Fed started its balance sheet in the wake of the Dot-Com Bubble – it offered low rates and cheap credit to fund the housing bubble. 

Cheap Money

There are people my age who have worked on Wall Street their entire careers, maybe started with an internship in 2002 – and they have never NOT known the Federal Reserve to step in and provide support to the markets and their institutions.

They are addicted to cheap money. As a result, these banks’ entire business models rotate around it. And now… it’s all over. The Fed has never had to deal with inflation before. And all the expensive stocks with lofty valuations, debt-soaked deals, and unprofitable crap they brought to the market in 2020 are imploding.

There is no “Fed Put” right now. And there likely won’t be. But here was a Morgan Stanley president – last month… he has been there since 1990… saying that people are sitting around trying to understand if the Fed is serious about not putting out the punch bowl this time.

“The banking calendar has quieted down a bit because people are trying to figure out whether we’re going to have this paradigm shift clarified sooner or later,” Pick said. They’re still holding out hope. They’re addicts. They don’t know any better.

Again, I don’t see a bottom in this market until the Fed completes its tightening cycle in September. With no major sector currently in positive momentum conditions, I continue to suggest that cash is your best friend today.

Dimon Fumes

JPMorgan Chase (JPM) CEO Jamie Dimon was spot on as usual today in his assessment of the global markets. But I did find it interesting that he fumed at the Fed for its stress test system. Dimon was angry – because he didn’t believe that his company should be stopped from buying back stock in the wake of this regulatory process. 

“We don’t agree with the stress test,” Dimon said. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious, arbitrary.” But, it’s necessary. Especially now. In 2008, after the Great Financial Crisis, the Fed demanded that Wall Street conduct annual stress tests in the event of a major market downturn. 

The stress test for JPMorgan showed that the company would lose about $44 billion in a substantial downturn while markets collapsed and millions of Americans lost their jobs. According to CNBC, Dimon says that the bank would have made money in this scenario. 

It’s good that he’s sticking his head out for shareholders… but we’re facing a financial crisis right now. So maybe he should accept the results and focus on navigating what’s in front of us.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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