What comes next is weak economies and tough policy choices.
Going back before going forward, in 2020-21, aggressively applied MP3 policies stimulated a high level of nominal spending growth that was well in excess of the output capacity of labor, with the difference between them producing a self-sustaining, monetary-induced inflation. In 2022, recognition of this condition led markets to discount a coming rise in interest rates and tightening of monetary policy. The Fed and central banks then followed suit. The speed and magnitude of the tightening has been severe, among the sharpest in the past 60 years. The primary effect of this tightening has been to drive asset yields higher to compete with the higher yield on cash, which drove prices lower through the present value effect. That is pretty much the full explanation for this year’s weak asset markets.
