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 fueled 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?