Following a chaotic end to 2017, the financial markets have somewhat settled over recent months. At least the cryptocurrency and precious metals markets.
However there has been volatility in the stock market and signs of deterioration in real estate as well. So have we reached the end of this historic rally fuelled by unprecedented amounts of Federal Reserve printed money and digitally created credit? Are the bubbles finally beginning to collapse?
It’s still a bit early to know for sure.
However it’s worthwhile to consider that, at least in my mind, what’s possibly always been the most likely pin to prick the bubbles has been a rising interest rate environment. Which is exactly what we’re experiencing right now.
Should rates continue to rise, which would be somewhat logical to expect in the short-term if the Fed does continue to raise short-term rates (which I do believe they will do at least 1-3 more times) and unwind its massive balance sheet (less likely, as will be discussed later in this report), that wouldn’t be good for stocks and real estate.
Remember that Ben Bernanke himself sold the quantitative easing programs almost a decade ago based on the economic effect that freshly created money offers in the short-term. However what he didn’t mention was how you would naturally expect the exact opposite effect when the money is taken away. Which is essentially what’s happening now, as reflected by the stock market’s reaction to the rising interest-rates.
With the Federal Reserve raising short-term rates, while also (at least theoretically) beginning to unwind its balance sheet of long-term debt purchased during the last bubble collapse, one of the major buyers is leaving the auction.
As a result, investors are requiring a higher rate of return and the yield is rising. Which makes sense. Because if even the Fed isn’t buying these junk bonds, and China has allegedly considered scaling back, why would anybody else want to?
Should rates continue to rise, it likely wouldn’t take all that much of a move to bring the stock and real estate markets crashing down. Similar to the exact same way those markets crumbled in 2007-2008, following then chairman Alan Greenspan’s decision to raise rates between 2004 to 2006.
So far the Fed is sticking to the script that it’s going to continue moving forward and allow rates to rise. But what they haven’t mentioned is how if rates continue to rise and stocks and real estate get pounded as a result, it’s incredibly likely that they’ll reverse course and start printing again.
It’s essentially the same scheme they’ve been running for decades, although it sure feels like this time when the latest bubble collapses that a lot of these money printing tricks will be exposed for good. While on one hand somewhat unfortunate economically, you have to admire how in its own right the whole thing has become quite theatrical.
With some of the U.S. government’s largest creditors (such as China) giving every indication possible that they’re fed up with the reign of king dollar, the evidence is growing that the current fiat system is coming to an end.
China and Russia have gone on massive gold and silver buying sprees. In the past year, even with the current decline in prices, the cryptocurrencies have still exploded at a rate relative to the dollar that’s symptomatic of a hyperinflation in paper. Add in the continued revelation about the shocking degree of corruption in the U.S. governmental structure and all of the pieces are in place.
There is a massive transfer of wealth happening as we speak. Again, not entirely unlike what we saw with the last bubble. It may or may not happen overnight. There will be periods like we witnessed last year in the cryptos that will be stunning to observe. Then there will be other times where it will seem like not much is happening.
But these forces are most certainly building beneath the surface. And should rates continue to rise it will be fascinating to see how the events develop.