I’ve been speaking for a long time about the risk we are running for a major market crash. This doesn’t make me unique. There is no shortage of doomsdayers who are constantly calling for a major market crash. Most of them end up being right about once every decade. That’s about the time it takes for a market to cycle and for us to get another major market correction.
What makes this situation unique is the position the Fed and other central bankers find themselves in. We know there’s a bubble in the stock market. It was created by Fed liquidity that was pumped directly into the bond market. When the Fed buys bonds directly, it reduces the interest rate. This is great if you already own bonds because it makes the ones you own more valuable. But if you’re looking to buy bonds the last thing you want to do is buy a 10 year bond at 2% interest. Given that inflation tends to run around 3-5% historically you’re almost certain to lose money.
This pushes investors who would otherwise prefer the safety of bonds into the stock market in search of yield. (Yield is really just another way of saying return on investment) This creates both artificially low bond “yields” and a bloated, rising stock market.
But with interest rates near zero what’s going to happen when we hit the next financial downturn? It’s been 7 years. We’re in the 3rd longest rally in stock market history. What is the Fed going to do? Does it intend to cut rates into negative territory?
On yesterday’s show I talked with my audience about what’s happening in the stock market and in economies around the world. Give it a listen and if you’d like to watch the entire show you can do so here.