Decades of quantitative easing flooded our economy with cash -- and most of it is still there.
Quantitative easing is a method of injecting the economy with cash to stabilize and inflate asset prices. This is precisely what the Fed set out to do to combat the financial crisis and then again on the onset of the pandemic. I think we can all agree their efforts were wildly successful, I think we can also agree they were too successful (rampant inflation).
Although the Fed has initiated a quantitative tightening process to reverse the effects of "money printing," there is still an unfathomable amount of money sloshing around the economy...at least for the time being.
Similarly, turmoil across the globe, frightening inflation, and the Federal Reserve's pledge to squash price pressures with higher interest rates have created a scenario in which money is gravitating to the U.S. dollar. Some of the dollar buying is occurring with a flight to quality or safe-haven theme, but others are looking to hold assets in the greenback in hopes of benefiting from the interest rate differential. In any case, the world is "buying" dollars but there aren't any obvious places where cash is being parked.
With stocks, bonds, and even most dollar-denominated commodities on a downswing, there could be quite a bit of dollar deposits sitting in cash. At some point, that cash will likely either need to be allocated somewhere or moved back into other currencies. That said, cash has been the only asset class that has "worked" for investors so reallocation might take some time.
Chart Source: QST
Where will all of this money go?
There is a good chance it eventually makes its way back into traditional assets (stocks and bonds) and, likely, gold and silver. While commodities and crypto might be some competition for these dollars, we suspect those that chased commodities and crypto higher in 2022 only to be burned will go back to the basics.
The bond market has had one of its worst years on record, particularly Treasuries. For decades, the Federal Reserve has maintained a goal of price stability, but one might argue their efforts have done the opposite. Quantitative easing and its unwind, have led to progressively higher highs and more volatile lows for bonds on the long end of the curve. However, the 30-Year Bond is as oversold as it has ever been and offers a yield not seen since before the financial crisis.
Will this be a place for sidelined cash to be put to work? Maybe not today, but at some point the odds of much larger allocations to duration are high.
Chart Source: QST
An alternative asset that has been out of favor but might also find support from sidelined cash looking for a home is gold.
We aren't a believer in gold as an inflation hedge or even a stock market hedge -- this year has been a stunning example of how poor it can be for such purposes. However, it is a great diversifier from traditional asset classes and in a year when nothing has worked, diversification probably makes sense.
Chart Source: QST
Bottom Line
By definition, inflation is caused by too many dollars chasing too few goods. In 2021, those dollars were chasing investments with reckless abandon but in 2022 those dollars have been chasing household necessities.
When the dust settles, we suspect there is still enough money sloshing around in the system and enough sidelined cash resulting from portfolio liquidation to stabilize, and likely propel, prices of investment assets (both traditional and not) higher.
This doesn't mean it is a good idea to blindly throw money at struggling markets but it should be a good reminder that prices have always been temporary and playing offense when markets become attractive is probably a solid game plan in the long run.
