dd for a credit crunch march-june '22, looking for contrary opinions/arguments why this is wrong

fed taper isn't going to chill, last fomc showed us that omnicron didn't make them flinch and despite the news' best efforts, each variant is getting less severe

mar is first month we get $0 free jpow dollars, he also said last fomc they will likely bump rates .25% as soon as asset purchases are done

we're already seeing a lot of this priced in pe's are getting compressed in small/micro caps a lot since last fomc

growth companies are coming off a diet of lots of free money, between ppp/sba financing activities but also traditional lending like banks or just share offerings. the banks have had way too much cash on their balance sheet since early 2020 and it's finally dissipated after 1.5 yrs of handing out the cheapest/easiest loans that regulation allows.

combine this "free money fiesta" ending with rising rates, leveraged companies will be unable to finance debt and growth companies will be unable to qualify for new financing to meet their growth objectives. "value" stocks still have access to credit as they can collateralize their equipment/inventories instead of projected revenue, as money tightens, lenders need something they can take away instead of just a moral obligation.

positions to reflect this sentiment:
long shares of $xlu (energy) and $xlf (financial) as they give exposure to highest book values
puts or debit put spreads on $iwm and $qqq, i think a lot of this is priced into $iwm already but $qqq has tons of market cap that's pricing in growth that hasn't been financed and you can't collateralize the metaverse...yet

why is this wrong or are there better positions to reflect this sentiment?

Right now roughly 70% of home refinances are cash out, new car demand remains at all-time highs, investment account margin remains near an all-time high, etc. With that said, I believe we are to blow a credit bubble for the majority of 2022 before seeing credit dry up. I'm calling a credit crunch in early 2023 with early signs showing up at the third rate hike. We could see a nice move down in RE if the above is true as many homes that had positive equity are now left with negative equity due to refinances. It will be interesting to see how cash-out refiances trend going into the first rate hike and afterward. My investment strategy doesn't change... $TSLA, $ENPH, $GOOGL, and high growth small caps. If the market underperforms, money will chase high growth small caps that have sold off for the last 6 months.

Forgot to mention that credit standards are loosening, which is allowing the above and growing the bubble. Once credit tightens, the crunch begins.

I don't think we're going to see a bubble burst, but we are going to see a strong tapering that results in slowed growth for a while. We aren't in a credit bubble right now, because a bubble implies the burst be catastrophic. I don't see any signs of something that big happening.


It's also important to remember that we can stay at a 5%+ inflation rate for a few years. For the past 10 years our inflation has been below the fed's target of 2%. We could theoretically camp at 10% yearly inflation for two or three years and still be within the inflation target for the past 15 years. There's a lot of doom and gloom about interest rates, inflation, and everything else, but we aren't in a dot com bubble, a mortgage bubble, or anything else like that. We're just over-valued and over-leveraged. Not everything has to be world-shattering. 5 years of slowed growth will bring us back in line with historical averages and we'll be chill. Use that time to accumulate companies that will be valuable in 10 years.

This post was edited by NetflixAdaptationWidow on Dec 29 2021 03:25am

@s3th
refi #s are up, other thing too is heloc production, i've been doing some dd on mortgage backed securities too if anyone is interested
great point that it will likely take much longer for this to shake out than i'm projected. market is forward looking though so it will start to react at the first glimpse of companies being unable to finance a new project/product, shareholders will evacuate anything that doesn't already have the assets and resources on their balance sheets.
why do you like $goog? I think they're in the direct line of fire for this. if they come out with a new product and need to hire a hundred ai developers to implement how are they going to pay those devs while they're unable to issue underpriced bonds/collateralize the project?

@netflexiadaptionwidow
this isn't really tied to inflation, i don't think inflation is actually an issue at all. a bump in rates will pump the breaks but also we see tons of deflationary forces at work, particularly as companies find ways to implement ai into their process it dramatically reduces turn times/labor required to complete tasks.
a bubble is exactly that... things being "over-valued" and more particularly "over-leveraged."
i'm not saying this credit crunch rivals '09 catastrophe, it might feel like it to some though since money is flowing to small/micro cap growth companies in '20 and '21 as easily as mortgages were getting funded in '08.

mostly agree except there are hints that inflation could be higher than the reported CPI figures suggest

with that said, as op suggested, as long as you invest in value companies (profitable companies that are underappreciated right now) one should be fairly safe