Liquidity problems? What liquidity problems?

This past month was a wild one for stocks, particularly in the growth-stock heavy NASDAQ 100. The index was down as much as over 5% as of May 12, before recovering a bit toward the end of that same week. Nevertheless, the remarkable rally the index has experienced from the lows set last March in the face of hopefully a once-in-a-lifetime global pandemic showed signs of coming to an end. The culprit for the shakiness was considerable worry about inflationary pressures caused by shortages and supply bottlenecks turning into corrosive inflation. The specter of 1970s style inflation hung heavy over stocks, with many market participants calling on the Federal Reserve to think about removing some of their tremendously accommodative monetary policy support sooner rather than later to head inflation off at the pass. Meanwhile, the Fed has been clear that they have not even begun to think about thinking about removing any accommodation in the near future. This has set up a great debate between the Fed and many notable investors and academics as to what should be done, if anything.

The one thing that everyone can agree on is that high and sustained levels of inflation are bad for many financial asset classes as well as a great majority of businesses and individuals. Moreover, the extraordinary monetary policy the major central banks have engaged upon for at least a decade has created the phenomenon of fixed income bonds and equities moving, often quite sharply, in the same direction. It might feel fantastic when everything goes up at the same time, but, conversely, it feels pretty awful when the opposite occurs. When that happened, as it did for part of last week, there is no place to hide.


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