Money creation is the king of the economy. But, just as the Federal Reserve eased monetary policy to manage the economic recovery from the pandemic, the opposite is true today; money “unprinting” is in full force.
In January, the data showed that, while the U.S. money supply quickly increased until April 2021, it had fallen negative for the first time in 28 years by the end of 2022. For the past three months, money supply growth has continued declining, and it’s now at its lowest level in 35 years.
Investors must consider how the Fed’s money un-printing policy will affect their investments in the coming year.
Why money supply growth matters
2021 saw the fastest bull market recovery since World War II, thanks to the Fed’s record-breaking quantitative easing (QE) and other accommodative policies. That’s because the Fed’s QE flooded the money economy with new cash and reduced the cost of borrowing.
However, money un-printing takes the opposite approach. Essentially, it’s an attempt to slow the pace of economic expansion and tame inflation. This approach, however, comes with consequences.
The collapse of Silicon Valley Bank (SVB) shows how the unprinting of money can be disastrous. SVB’s bond portfolio yielded a 1.79% rate compared to the 3.9% offered by US treasuries. After the bank decided to sell new shares to make up for its losses, its stock price plummeted by as much as 60 percent, prompting a run on the bank to the tune of $42 billion.
SVB is neither the first nor only casualty of the un-printing of money; it’s just a high-profile example. SVB has done business with nearly half of US tech startups, illustrating the ripple effect of quantitative tightening on the economy. On a macroeconomic level, the data shows that the monetary slowdown has already impacted growth: Home prices, job openings, and the manufacturing outlook are down, while credit card debt and consumer loan delinquencies are up.
The impact on investments
The loss of “easy money” creates an environment of risk aversion. In such an environment, investors need to be even more cautious in their investments and focus on the long-term horizon. The key is to look for value beyond the short-term turbulence.
Historically, private markets have strongly outperformed in times of monetary tightening. There are several reasons for this: private markets are more insulated from public market volatility, and private market assets tend to be less liquid than their public counterparts, which makes them less affected by short-term shifts in the market.
With a longer holding period and over a trillion dollars in dry powder, VCs can ride out the storm, buying out discounted companies along the way. They can then integrate these companies into their portfolio, providing a quick shot of growth and opportunities for market consolidation. That’s why VCs are still winning and continuing to find investments.
This is not to suggest that financial professionals take a blind bet on private markets; the key is to be judicious in your investments and to consider each opportunity carefully. A good starting point is Gridline, a digital wealth platform that provides access to a curated selection of professionally managed alternative investment funds. With Gridline, you can gain diversified exposure to non-public assets with lower capital minimums, lower fees, and greater liquidity.