Last week the U.S. bond market tumbled. Now on Monday the stock market was down as much as 1500 points during the trading session.
Given the historic bubble that has been inflated by the Federal Reserve’s unprecedented loose monetary policy, it was only a matter of time. And now as many in the markets are becoming concerned about rising interest rates, the fatal flaw of printing money is being revealed.
To juice the stock markets and create the appearance of wealth was actually a stated goal of Ben Bernanke’s quantitative easing policies. He even said as much in his 2010 op-ed in the Washington Times:
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth.
For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
What he never mentioned however, was that the exact opposite effect would have to occur when the easy money was removed. Now that the world has caught even a hint that rates might go up, the impact is being reflected in the stock market.
So have we already seen the big move, or are the declines of the past week just the beginning of a 2007–2008 type market correction? It will certainly be interesting to watch the stock and bond markets in the following days and weeks to find out the answer.
Should long-term rates continue to rise, the Fed continues to raise short-term rates, and China follows through on speculation that it’s stepping away from the US treasury market, then the declines of the stock market will have only begun.
However if that does occur, what exactly do you expect the Federal Reserve is going to do? Is there really much doubt left at this point that they will just revert back to lower interest rates and more quantitative easing?
These are the same questions the Fed never answered back in 2009 when it began its reckless policy. And they’re the same unanswered questions facing the markets today.
The unfortunate reality is that Fed policy has inflated massive bubbles in the stock, bond, and real estate markets, and these will eventually either pop, or have to be propped up by even greater amounts of printed paper.
This is why investors are turning to cryptos. This is also why so many have turned to gold and silver as a hedge against never ending newly created money. Now the warning signs are finally going off, and anyone who is not paying attention is at risk of being left behind.
So while it remains to be seen whether this was just a warning or the beginning of the bigger move, the ultimate outcome remains clear.
February 5, 2017