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  • Victor C. Bolles

Capitulation (or not)

I am confused. I must admit that. I think I usually have a pretty good understanding of what is going on in financial markets, but right now I am confused. The plummeting stock markets make it very clear that people are selling, selling, selling stocks. The S&P has lost $7 trillion in value in 2022. Of course, a lot of those losses are paper losses, but it is clear that people are taking a ton of money out of stocks. But where is that money going?

The principal safe haven in tough times has been US Treasuries. But Treasury yields are up – substantially – which means that Treasury prices are down. And prices go down when more people are selling than buying. So instead of investors taking money out of stocks and putting it into Treasuries, investors are taking money out of stocks and Treasuries. The money is not going into Bitcoin. This week Bitcoin broke below $20,000 – a two year low. So, Investors are taking money out of Bitcoin as well. The money is not going into non-fungible token (NFTs) either – Fortune Magazine reports that the NFT market capitalization has fallen from $23 billion to $10 billion. Investors are losing their shirts on NFTs. Gold, another traditional refuge, is flat. And the Mortgage Bankers Association reports that mortgage applications hit a 22 year low, so the money is not going into real estate. Maybe all the money is going into baby formula and tampons, I don’t know.

The market is nearing the point of capitulation, but it is not there yet. The price/earnings ratio for the S&P is currently at 18.6. This is still a bit high historically, but well below the ratio of over 35 at the beginning of the year. Remember, P/E ratios are inversely related to interest rates, so as interest rates rise P/E ratios will fall. This week’s 75 basis point increase in the Fed Funds Rate has resulted in major declines in the stock market and its P/E ratio. And as inflation impacts the bottom lines of companies, earnings (the numerator) will also likely decline throughout the year putting more pressure on stock prices.

I don’t know about the nation as a whole, but in my neighborhood real estate prices are nearing capitulation as well. Last year, houses in my neighborhood were selling within a week of being put on the market, often at prices well above the asking price. Right now, with mortgage rates climbing, many houses have been on the market for 60 to 90 days, despite price reductions (tell that to my county appraiser).

The Fed is will also begin to reduce its $8.5 trillion balance sheet, but at around $50 billion a month starting in June, this action will take time to suck up a significant amount of the liquidity it had previously injected into the economy.

With all the markets in decline, where has all the liquidity that has been injected into the economy ever since 2008 gone? If you are lucky, then your losses are paper losses. If you were foolish enough to think that the market could only go up, and you borrowed money to buy even more, then margin calls have probably left you broke. Big hedge funds are feeling the pain (and many have had to liquidate) but your 401 (k) is feeling the pain as well.

In most cases, after market capitulation, companies and investors change strategies to deal with the new challenges they face. The problem we face is what should that new strategy be? There is nothing on the horizon to give us hope for a better future. The war in Ukraine is reaching a stalemate and could go on for years to come. Supply chains are still clogged and the closure of shortages in one essential commodity (like baby formula) are met with new shortages (like tampons). Energy is in short supply, and nothing is coming on stream to close the gap. Yield curves are inverting, and corporate CEOs are discussing how they will deal with the coming recession. Sidelined money waiting for the next new investment is being eaten up daily by inflation. What to do?


There is one important group, however, that is refusing to capitulate in the face of changing conditions – the Biden Administration. They continue to insist that their $5 trillion Build Back Better plan will reduce inflation despite the fact that all the money of their previous spending plans is what triggered the current spike in inflation. They insist that the rising prices at the gas pump are the fault of Vladimir Putin’s war on Ukraine. And when people point out that gas prices were rising long before Putin’s invasion, they blame greedy energy companies instead of their green energy policies that promised to shut down the fossil fuel industry in just a few years (and President Biden emphasized that point by shutting down the Keystone Pipeline on his first day in office). Not much incentive to invest in new production capacity when government regulators are trying to shut you down.

The Biden Administration and the Democrats, of course, blame intransigent Republicans for opposing their plans to make America a woke socialist paradise. They also blame moderate Democratic senators Joe Manchin and Kirsten Sinema for voting their conscience instead of marching lockstep to the President’s dictates. But ultimately, they are blaming you, Mr. and Ms. US Voter, for not comprehending the wonderfulness of their leftist agenda. They keep insisting it is a communications problem, as if beating you over the head about how you should care more about the public interest (as they define it) than your own self-interest will change your mind. They will keep trying to convince you of the moral superiority of their policies while your actual self-interest keeps getting further and further attenuated as prices continue to rise, crime runs rampant, and people continue to pour across the border. Eventually they will simply tell you to follow their orders or be punished because they know what’s best for you better than you do. That’s how they roll.

Democratic President Bill Clinton chose a different strategy. Faced with Republican majorities in both the House and the Senate (a prospect that President Biden is likely to face in 2023) Bill Clinton chose to work with Republicans for the good of the country. Together, they passed a major welfare reform and balanced the budget that resulted in the first budget surplus since 1969. Despite budget surpluses (and in defiance of all the Keynesian economists) GDP grew between 3.77% and 4.75% during his second term. Bill Clinton left office with high approval ratings near the level reached only by Franklin Roosevelt and Ronald Reagan.

President Biden could do a lot to repair the damage he has already done to America by changing course. He might also improve his approval ratings which are down amongst the worst ever recorded. He needs to modify his energy policy to recognize the strategic importance of oil and gas. He needs to take the regulatory knee off the neck of American industry. And he needs to sacrifice woke ideology to achieve the excellence in education that America needs to face the existential challenges that confront us in the twenty-first century. Otherwise, he will be relegated to the dustbin of history (right next to you know who).

19 views2 comments


Jun 22, 2022

What a woeful outlook you paint. And just what IS a body to do? There are two or three bright spots on the scene worth keeping in mind: Mr. Clinton and colleagues on both sides of the aisle created a special class of Treasury obligation called the I-bond, the interest on which is pegged to inflation. The current yield is 9.62% annual interest rate, equal to the latest CPI. Thank you Bill. Tesla is now making cars in the US that are world class, and give drivers an alternative to gas powered cars. They are also REALLY fun to drive, and one day may even let the geriatric set keep their cars longer, due to Full Self Driving. Thank you…

Victor C. Bolles
Victor C. Bolles
Jun 22, 2022
Replying to

It is a rather woeful outlook because President Biden refuses to change his policies in light of changing circumstances. I-bonds are a good alternative. I switched to TIAA-Cref guaranteed return right after Joe was elected. And Elon is making those new Teslas right here in Austin Texas and even switched to voting Republican. There is hope.

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