The Fed’s Aggressive Pivot May Be Deflating Speculative Bubbles

January 10, 2022

As the Federal Reserve assumes a more aggressive stance to combat inflation and the decade of easy monetary policy comes to an end, investors are reassessing their riskier holdings, leading to big losses among speculative assets.

Bloomberg provides an overview of how everything from cryptocurrency and meme stocks to money-losing tech funds are losing momentum. Bloomberg cites a Bank of America strategist who says that bubbles are “simultaneously popping” across a wide swath of speculative investments.

Ark Investment Management’s Innovation ETF, which is dominated by expensively valued tech stocks, has fallen nearly 46% from its record high. A Goldman Sachs index that tracks unprofitable tech stocks has plummeted in recent weeks, and an index that tracks special purpose acquisition companies (SPACS) has fallen 35% from its highs.

Cryptocurrencies have also fallen substantially. Bitcoin ended last week down 40% from highs it had reached as recently as November. Ether, the second-largest cryptocurrency, has also fallen about 35% from recent highs.

Speculative commodities have suffered as well. Palladium has fallen 35% from a record-high set in May.

While some analysts have declared this a bubble bursting, it remains too early to say if this is the start of a sustained trend or a temporary setback as investors reassess how much risk they are willing to carry in an environment of tightening monetary policy and climbing interest rates.


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