Prediction: We are Entering the Great Correction

Don't Fight the Fed

Be careful what you wish for in 2022. Analysts are divided on how many interest rate hikes we should be expecting in 2022 or are even priced in to the forward looking markets.

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This is an Op-Ed about the general macro environment we find ourselves in relating to the equity market. Feel free to to dispute my opinions in a comment below. I welcome constructive feedback and diverse views.

If 2021 was the year of the Great Resignation leading to a great reshuffle and great automation at work with digital transformation, I think it’s safe to predict that 2022 is shaping up to the year of the Great Correction. What does this mean? It’s risk-off mode for equities.

Most of the NASDAQ has already entered correction and bear market territory. I think mean reversion has a long ways to go. It’s difficult to make predictions or set stock buy and sell price points in such an environment where we might have five to seven interest rate hikes.

Already earnings?are starting to disappoint. Consumer cash savings are dropping. Labor market and supply chain woes continue. Inflation is rampant. P/E levels of top stocks are still at dangerously unsustainable levels. Most portfolios will take a risk-off break from such a market, for who knows how long.

Companies like Peloton have suddenly lost 85% of its value over the past year, and it’s only going to get worse for many of the Pandemic stocks and the ARK Cathie Wood innovation stocks that don’t even have real earnings yet to report.

Even worse it appears Bitcoin is completely tethered to liquidity trends of the NASDAQ. Bitcoin (supposed to be a hedge) keeps correcting. Bitcoin is down another 4% pre-market today to the $39,000 levels. It’s down 20% in just a month. The Second Bitcoin bull market could be over in 2022, realistically speaking.

We have been warning of a bubble market. The current S&P500 10-year P/E Ratio is 38.0. This is 90% above the modern-era market average of 19.6, putting the current P/E 2.3 standard deviations above the modern-era average. In theory the correction could continue and become much more drastic. However with inflation and rising interest rates, even the cash is going to be not so great.

Negative Momentum and Inflation Could Spell End of Bull Market

When Netflix and Peloton are raising prices it means they are putting the cost of inflation back on to the consumer even when demand for their products is low due to higher competition. This is a terrible sign of things to come. Banks declining even after earnings is another red flag. Banks are theoretically supposed to do well in higher interest level environments.

Three rate hikes for 2022 is not a good baseline. Many believe the Fed needs to correct on their own miscalculations in 2022 and 2023. This means the stock market could be even more volatile than usual. As confidence drops, momentum to the downside could surprise some people. We’ve been spoiled since 2020, and many of us might pay the price.

P/E ratios are a cornerstone of fundamental stock valuation analysis, and are most commonly looked at for individual firms. The P/E ratio is (as the name suggests), a ratio of a stock price divided by the firm's yearly earnings per share. However since 2020 these “rules” have broken down as the Fed pumped around 30% more liquidity into the system. Billionaires got around?60% richer during the pandemic?so far.

This allowed them to pump things like Tesla, Bitcoin and other Woodstocks for profit while creating false flag events for new retail investors like the Reddit rebellion orchestrated by Hedge funds to profit on both the upside and downside. It was not a real event.

There’s a 50% chance now that in 2022 we will enter a period I call the Great Correction. Many stocks have already corrected 50% or more from their February, 2021 highs, that now seem as dramatic as the March, 2020 lows. But the worst is likely yet to come as the Fed could even do up to 7 rate hikes in 2022 and early 2023.

If that’s not a catalyst enough for a Great Correction (major market news channels are trying to do damage control on behalf of the financial elite), there’s a likely invasion of Ukraine and global conflict around Russia. It’s not thought the vulnerable equinity markets would do well with a geopolitical conflict and possibly more variants of Covid-19. Global herd immunity while better, is not great due to much of the world still not vaccinated.

The World’s Billionaires?made over $5 trillion last year, this is a great environment for them. If their wealth is growing at an unpresented rate, so is wealth inequality as Biden’s approval ratings around the economy plummet. With a China slowdown likely, the whole world is tethered to consumer economies like China and the U.S. Around 4 million jobs that existed before the pandemic, essentially no longer exist.

Today Netflix stock price is down by about 20% pre-market. That’s nowhere near the correction it will need to return to pre-pandemic price levels. BigTech stocks are also in a bubble, if they or even Tesla reaches for a correction, there will be tremendous pain the markets that are being propped up by just a few FANG like big names that are stuffed in passive investment ETF strategies.

Let’s great real. U.S. central bankers last month signaled they will raise interest rates three times this year and sped up the pace at which they are tapering their asset purchase program. A strong economy and labor market combined with consumer prices rising?seven per cent?last year have seen them pivot sharply toward combating the highest inflation since 1982. The Fed changes alone would mean a dramatic shift to how a new generation of retail investors behave on the markets.

A Great Correction is coming in 2022 or 2023, since we are way overdue for a mean reversion moment in the substantial spike of total liquidity and a generational moment of 2020 in terms of buying power and profit gains by a Fed that was overlay aggressive. We will all pay a price for this exaggeration.

Gallup finds only about 56% of Americans reporting that they own stock, based on polls conducted in April and July, 2021. This means the rich got richer and the poor got poorer a dangerous trend in American capitalism. If you have a good job you think the economy is doing great. If you are in the bottom 40% are you probably struggling.

In 2022 we are discovering inflation is not temporary after all and a Great Correction is more likely to occur as Earnings aren’t as shiny as we were told they would be. The big manipulation of equity markets appears to be fading and over. Don’t fight the Fed, things will get worse before they get better.

I can respect Jerome Powell for trying to fulfill his mandate with the American Central Bank’s policies and achieve consensus among a divided Fed, but these policies in the long-term are dangerous to the entire system of Capitalism as I believe the 2020s will show with the exaggerated wealth inequality we are facing, an era of stock market volatility gamed by those who have the biggest incentives to make it happen.

Thanks for reading!

To read my on-going articles on stocks and investing subscribe to StockQuest here.

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