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The Hangover: Too Much Money

The Big Cash Party

As the worst of pandemic fears fade into memory it’s easy to forget the panic of 2020.

A “shutdown” had never been attempted, and amid the fear, uncertainty, and market panic, the Federal Reserve did the only thing it could do to help: print money.

It printed $4 trillion.  While this didn’t involve literally running the printing press, it created that much cash out of thin air.  What they really did was buy bonds on a massive scale.  When the Fed buys a bond from a bank it gives the bank cash for the bond, and that cash is freshly minted on the spot.

The flood of cash was helpful during the worse of the pandemic, it kept the markets lubricated and functioning relatively normally.  The fresh, new cash was the spiked punch in the punchbowl.  Cash in hand, investors bought everything they could.

Bond prices ran up, pushing interest rates down.  Stocks moved to record highs on valuations that made little sense.  We saw crypto currencies move into the spotlight and surge.  We saw home prices take off on cheap mortgages.  We saw new inventions like NFTs spike.  Why were people paying steep prices for things like the exclusive right to an NBA slam dunk video?  The list keeps going.

People were flush with cash, stuck at home, and drinking the Fed’s spiked punch.  To prevent a panic the Fed kept the punch flowing for too long, which they’ve now admitted.

The punch bowl was allowed to run dry in March when the Fed stopped buying bonds, and began increasing interest rates.  The hangover begins.

The Hangover

When lots of new cash is printed, under normal circumstances, the result is a spike in inflation.  Because of the complexities of the pandemic world it took a long time for the inflationary fire to get started.

The Fed was caught off guard, and did the only other thing the Fed can do, destroy money.  It began raising interest rates, told the markets it will keep raising interest rates, and announced a plan to start destroying some of the newly printed cash.

The bottom line: with cash leaving the economy en masse, the tide is going out.  This hangover has two painful symptoms: the inflationary fire caused by the high proof punch, and the Fed’s action of taking away the punchbowl by pulling out that cheap, new money, which puts downward pressure on almost all financial assets and growth.

The economy survived the pandemic, but now we’re in a painful place.  We see costs rising in real time, and our investment portfolios have taken a bruising.

Let’s look at stocks and bonds.


Inflation is kryptonite to bonds.  As prices rise the purchasing power of bonds is eroded.  Prices and yields have a seesaw relationship.  When yields go up, prices go down.  Since bonds are expected to compensate for inflation, as inflation has increased, bond yields have increased to keep up, pushing prices down.

This is being exacerbated by a Fed that: stopped buying bonds (printing cash), began increasing the Fed Funds rate, which pushes all rates up, and burning money by letting bonds it owns mature without reinvesting the cash.

We haven’t seen this since the 1980’s, but it’s the same playbook.  The only way to put out an inflationary fire is to make money more expensive.  In the world of bonds what’s happened so far this year is as rare as it is painful.

The good news, the worst may be over for bonds.  The bond market is looking over the horizon, and sees a slowdown coming.  The bond market sees a Fed that could be forced to begin cutting rates in less than a year to combat a recession it helped create.  You read that right.


If the bond market was the somewhat reserved partier through all of this, the stock market was like the cast of Animal House.  Stocks spent most of last year exceeding any reasonable valuations, and chanting drinking songs as if the speed of the pandemic recovery would be the speed of growth forever.  It was bizarre.

In January an inebriated stock market looked around and saw the bond crowd piling into Ubers, and realized the party was over.

Stock prices now only look fair in terms of bloated estimates that still haven’t come down.  The hangover could worsen here as prices begin to reflect an economy that is slowing down.

Despite the pain, with a long term perspective, stocks have a better shot at fighting inflation.  As inflation rises, companies charge more for goods and services, which allows earnings to keep up with inflation.  While earnings may drop with an economic slowdown, price increases offset the bite of inflation in the long run.

Wrapping It Up

The hangover has been painful, and the pain is likely to continue, possibly to the point of a recession within the next twelve months.

The Fed did what it had to during the depths of the pandemic to keep the economy from unraveling.  Printing, or destroying money, is always a blunt force that lacks precision.  The system doesn’t turn on a dime, and The Fed waited too long to take the foot off the gas.

Bonds may have turned the corner in that they are now rising as stocks drop, which is the typical relationship as investors seek the shelter of bonds amid uncertainty.  Inflation is close to a peak, and should begin a long road back to “normal.”  Stocks are getting close to reasonable values, but remain rocky.

The good news: we still have a functioning economy, something that shouldn’t be taken for granted.  The bad news: it’s been a wicked hangover that’s probably far from over.

Hopefully, this is the beginning of the final chapter of the pandemic’s impact on the economy.  It was quite a “party.”



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