The financial markets and the real economy have all sorts of feedback effects. Up to a certain threshold, shocks in the financial markets can be localized, but beyond that, they propagate to the real economy, and result in death spirals.

Back in 2007, I was chatting with a hedge fund person and said "all these things are just technicals". And she replied: "yes, but technicals sometimes become fundamentals". Of course, she turned out to be absolutely right in the end.

It's because financial markets are about money, which is a different word for credit, which is a different word for trust. As long as people trust the economy is strong, the economy is strong. But when the trust diminishes, then various nasty things appear: banks tend to be more cautious with firms that want to renew their annual loan (sometimes they offer a lower balance, sometimes they don't renew it at all). Some companies put hiring freezes. Some even start laying off people. A very stealthy form of unemployment kicks in quite quickly: people in the gig economy don't get as many gigs as before. Here's an example: in your own building, how many Fresh Direct deliveries do you see nowadays, and how many did you use to see one year ago? All those missing Fresh Direct deliveries and gigs that some people didn't get. The Fed may monitor this type of unemployment, or they may not. They are certainly not talking about it that much. Chair Powell keeps telling us there are 50% more job vacancies than available workers, and keeps reassuring us that the economy fires on all cylinders. But that's not quite the whole story.

So, when people start to feel a bit nervous, they obviously first cut the more risky investments. That's why you are hearing the VC funding has dried up. Because VC funding is highly risky. This is the first to go.

But little by little, not only companies will start being more cautious with their money, but people too. Of course it starts with those people in the gig economy who just don't see the cashflows they used to see half a year ago. But then it will continue with lots and lots of people who have good jobs, but see a sharp decline in their investment portfolios. I personally reduced my equity exposure significantly, and I bet I'm not the only one. Well, all those people who reduced their exposure, did that by selling. And lots of sales means price declines. But some people don't sell because they are a bit more cautious, some sell because they are highly leveraged, and they need to sell, because they get a margin call. These are the hedge funds.

Hedge funds have trillion of dollars in investments. They make money by levereging up as much as they can. Of course, after 2008, the insane leverage ratios seen up to that point don't exist anymore, but still. Whenever you are leveraged, and your investments go down in price, you are liable to get a margin call. If you don't come up with more cash (and where do you get the cash from?), then you need to sell. And you sell in a falling market.

What happens is a "run on the economy". Right now we are at the stage of a "brisk walk on the economy". It's difficult to predict the crowd sentiment just as it is difficult to predict the market (well, duh, these 2 things are one of and the same). So, maybe the crowds will change their minds, and say "now's a good time to buy". But maybe not.

In my mind the pace of the "brisk walk" will just get more alert. We may get to full blown panic quite soon. But again, we might not.

Bottom line: there's no such thing as a "fundamentally strong economy". Because the economy is just as strong as the confidence of the participants in it. And that confidence can turn to panic very quickly.