Last week the U.S. bond market got clobbered. This week it was the stock market’s turn.
Which given what happened in the bond market is hardly surprising. Over the past decade we’ve seen the U.S. stock markets triple, primarily based on cheap Federal Reserve credit and unprecedented monetary easing.
Now with rates going up that trend has reversed.
In fact, when former Federal Reserve Chairman Ben Bernanke launched his controversial quantitative easing program back in 2010, he actually even admitted that the purpose was to juice the stock market.
“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.”
Of course if these conditions can be created simply by adding credit, the opposite can be expected when the credit is removed. The simplest example being how the subprime market collapsed when Alan Greenspan started raising rates after he had lowered them to 1% for a year.
So it is noteworthy to see how severely the stock market has been impacted by the recent rise in rates. Which of course raises the question, if this is what has happened before rates have even reached 3%, what’s going to happen if yields continue to climb past that level?
Which if the Fed is going to continue raising rates, unwinding it’s $4 trillion balance sheet, and at the same time China is considering reducing its own allocation of treasuries, is exactly what’s going to happen.
I continue to believe that at some point when there’s enough pressure on the stock market that the Federal Reserve will reverse course and ultimately respond with an easing campaign that will blow away anything we could possibly conceive.
Which is why despite the manipulation in the precious metals markets, owning gold and silver still makes so much sense. As well as investing in cryptos that have real value and a finite supply.
We will find out in coming weeks whether this is just another warning, or the beginning of the bigger move that so many including myself have expected since Bernanke’s op-ed.
In either case, at least considering removing assets from the dollar-based system continues to be worth investigating. Perhaps there is longer to wait, although if you are looking for any warning signals, the stock market has just demonstrated what’s to come if rates continue to rise.
February 9, 2018