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The More Rates Rise, The Sooner The Bubbles Pop

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The Federal Reserve held its latest policy meeting this week, and continued to indicate that the economy looks great in their eyes, and that it’s full steam ahead with interest rate increases (at least the Fed’s version of full steam ahead, as we are still talking about a short-term target rate of less than 2%, even 10 years after the last crisis).

The Fed did end up raising it’s target rate by 25 basis points (one quarter of a percent), although sometimes with all of the complexity that exists in today’s financial markets, it’s easy to lose track of what that really means. As well as what it means that the Fed somewhat surprised the markets by saying they anticipated 2 more additional rate hikes later this year (which was on the high end of the prevailing Wall Street sentiment).

But simply put, the more interest rates go up, the more likely the bubbles in the stock, bond, and real estate markets are to pop. And the sooner that’s all likely to occur.

Keep in mind that this is all at the same time that the European Central Bank is talking about ending its own massive bond-buying program. And if that actually does end up being the case, one can only wonder who’s going to buy all of these bonds. Or what impact that action would have on the Italian debt market. Where yields have already spiked in response to the growing awareness that many of these established nations are in reality insolvent.

Throw in a trade war between the United States and China that continues to escalate (China again instantly responded to the latest U.S. tariff by striking back with a $50 billion tariff of their own), more cause for concern in the banking sector, a rapidly deteriorating currency in Argentina, and growing concern in the “emerging markets”, and it’s somewhat puzzling that the Fed doesn’t seem the least bit concerned about any of these risks.

Perhaps that’s why countries are beginning to adopt alternatives to the petrodollar, as well as alternatives to the dollar itself as the world’s reserve currency. Which are stunning developments that are changing the financial balance of power of the world right in front of our eyes.

It’s not a coincidence that many of the markets have stopped their almost decade-long rally at this particular point in time.  This is what the Austrian School of Economics laid out so beautifully and eloquently decades ago, and what not only allowed many investors to see the 2008 mortgage crisis in advance, but have also allowed them to know how to respond in positive fashion this time around as well.

As interest rates continue to rise, we will continue to see the effects of the past decade of Federal Reserve policy. This will put incredible strain on the stock, bond, real estate, and derivative markets, with physical precious metals and select cryptocurrencies being the alternatives I continue to hold in response.

Ultimately I trust you will choose whatever makes the most sense for you and your own family. But hopefully this article at least allows you to be aware of what’s becoming increasingly likely to occur in the near future, while there’s still time to do something about it.

 

-Chris Marcus

June 15, 2018

 

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