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“Almost half a trillion dollars has been wiped from the valuation of once high-flying financial technology companies that took advantage of the boom in initial public offerings earlier in the pandemic.”
So writes Nicholas Megaw and Imani Moise in the Financial Times.
“More than 30 fintechs have listed in the U.S. since the start of 2020. according to CB Insights data, as investors flocked to companies they believed could benefit from a long-term shift toward digitization accelerated by the pandemic.”
This is just one more example of what can happen when a central bank injects too much money into the banking system and continues to inject money for an unwarranted period of time.
Other examples of the bursting of asset bubbles are the “blank check companies,” the Special Purpose Acquisition Companies, or the SPACs, and the cryptocurrencies.
The SPAC boom took off by the end of 2020 and peaked out in early 2022.
For example, we saw the capital that was injected into the cryptocurrencies peak at around $3.2 trillion in November 2021, from about $!.2 trillion in early 2020. Right now the capital value of cryptocurrencies is around $1.1 trillion. I have written quite a bit about this turnaround.
This is what the Federal Reserve generated when it pumped trillions of dollars into the U.S. economy in order to prevent a collapse of the financial markets and the economy caused by the spreading Covid-19 pandemic and the economic recession that followed it.
Money moved in almost every corner and alley in the world where financial deals were being initiated.
Now, we are on the reverse track and money is flowing out of these initiatives.
Going In The Other Direction
The Federal Reserve is now raising interest rates and cutting back on its securities portfolio. This is causing money to flow back out of these ventures that were started over the past two- to three years or so.
The rising interest rates have been joined by a lack of profits within the industry, and untested business models are being strained by the threat of a potential recession.
Megaw and Moise state that the “Shares of recently listed fintechs have fallen an average of more than 50 percent since the start of the year compared with a 29 percent drop in the NASDAQ Composite.”
Around $460 billion has been lost.
How far this decline will continue depends upon the path of the Federal Reserve.
As has been seen in recent earnings announcements, traditional commercial banks have been hurt by the Fed’s tightened monetary policy.
The fintechs have to deal, not only with the tightening Fed, but also with the unknowns associated with being a new type of institution with executives that do not have the same training and experience of the traditional commercial bank executives.
Throughout The World
But the problem exists throughout the world.
The Federal Reserve has been the primary source of the excess monetary ease throughout the world, but other central banks, including those in Europe, have also followed along.
The world has also taken advantage of the abundant access to funds and built up debt loads everywhere.
Unfortunately, along with the United States, many other central banks are also withdrawing from financial markets as
“blistering inflation and rising U.S. interest rates send investors fleeing.”
More than $52 billion have already been pulled from emerging market bonds this year.
Investors are saying that the sell-off is “one of the biggest seen in 25 years.”
Now, other central banks are also removing funds from world markets such as Canada, England, and one or two others, are raising their policy rates of interest and cutting back on market liquidity.
The European Central Bank is now considering a 50 basis point rise in its policy rate accompanied by supporting changes in its purchase of securities.
Rise In Value Of U.S. Dollar
The rise in the value of the U.S. dollar is not helping.
A lot of foreign debt is financed by dollar-dominated debt.
As the value of the U.S. dollar rises, the cost of servicing the dollar-denominated debt rises. Emerging nations have not experienced the kind of pressure they are now facing in 30 years or more.
The yield on 10-year sovereign bonds, in some countries, has risen by 10 percentage points.
The International Monetary Fund is “the world’s firefighter.”
The IMF is doing what it can to support these countries and as they help more and more emerging countries to carry their debt.
But, the burden increases almost daily.
Kristalina Georgieva, head of the IMF, sounded the alarm this week, saying,
“The situation is increasingly grave for economies in or near debt distress, including 30 percent of emerging market countries and 60 percent of low-income nations.”
Moving Forward
Like most of the rest of the world, the financial markets are in disequilibrium.
Nothing is stable.
Unfortunately, much of the disequilibrium in the world has been created by the central bankers who are supposed to be the guardians of economic stability.
Now, these central bankers are in a fight to keep the system from collapsing, but within an environment that needs constraining.
This is not an easy battle to fight.
But, this situation highlights another historical fact.
When central banks are really doing a good job fulfilling their responsibility, one hardly hears of them, one hardly knows they exist.
When central banks have not done their job well, one hears their names blasted all over the newspapers, the TV, the radio, and everywhere else.
Today, hardly a news release does not carry something about the Federal Reserve. In fact, often there may be more than one Fed “story” to put on the news.
What does this tell us?
Our problem, however, is that we have to live with what has been left with us.
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