'We really did hit peak stupid' -- Linette Lopez on the return to reality-based markets

Lopez was unfashionably early to this party, having pointed out for years the absurdity and precariousness of the hype and bullshit economy. Her reporting and analysis have been consistently frank and independent, as have her regular appearances on public radio's Marketplace.

 On a not unrelated note, Elon Musk hates her. 

This latest column won't make her any more popular.

Every once in a while on Wall Street there is what is called a "washout": a cataclysmic shift in the market that swaths of the investment community do not survive. Wall Street is standing on the edge of such an event. So if you want your "billionaire tears," you shall have them.

Why now? Well, after more than a decade of keeping interest rates near zero, the Federal Reserve is all but assured to raise them multiple times in the coming year to fight inflation. In the world of finance, these hikes are akin to messing with the Earth's gravity. Assets that were once attractive — companies that used cheap capital to grow rapidly without making a profit — will be shunned. Some of the investors who ate up those growth stories will go out of business. This is not a drill. It's the beginning of a bear market . And based on conversations with some of the most elite investors on Wall Street, it's clear that this drop isn't a months-long process. It'll take a year or more.

"I think there's going to be a few people who've really gone over their skis and will get hurt badly," one billionaire value investor told me.

Silly season's over, folks

Before the pandemic, the most pressing problem for central banks around the world was the meandering recovery from the financial crisis. Growth was sluggish, and inflation was well short of their target, prompting the Fed and others to keep interest rates historically low to encourage banks to give out loans and juice the economy. A side effect of making money easy to borrow was that all kinds of garbage ideas could get funding and all kinds of garbage companies could stay in business. Combine that with lax corporate law enforcement and you have Wall Street without consequences. Investors were champing at the bit to pile into companies that used fantastical metrics, like WeWork, and lapped up every utterance from billionaire CEOs who promised flashy technology but consistently underdelivered, like, say, Elon Musk.

And that was before millions of bored, homebound Americans jumped into the market via Robinhood and other trading apps. Armed with their pandemic-era stimulus checks, they bought crypto, piled into blank-check companies called SPACs, and joined message boards claiming that stocks like AMC and GameStop were going "to the moon." Awash with capital, companies — especially in tech — saw their valuations leave Earth's atmosphere and make a home somewhere on Saturn. Short sellers were culled. Value investors went into hiding.

"We really did hit peak stupid, but peak stupid extended beyond truly, truly stupid and then we went to bottom-of-the-ocean-rare-earth-metal-companies stupid," the value investor told me.

This is the kind of bubble a financial professional should see forming — one where investors lose sight of fundamentals like profitability and cash flow and embrace a kind of Beanie Baby zeitgeist. In fairness, on Wall Street you can make a lot of money dancing to the music at a bubble party. Or you can stand by the snacks and watch. What you cannot do is pretend that the music will never stop.

We've all heard the sound financial insight that the market can stay irrational longer than you can stay solvent. I'd like to offer a corollary: The market can go back to rational faster than you can get out of it.