Much of the attention in the financial markets this week will be focused on the Federal Reserve’s upcoming meeting on Wednesday. Where it’s widely assumed that the Fed will raise its short-term interest rate target by 25 basis points.
So why is this particular meeting so interesting?
Primarily because the market’s reaction will likely offer valuable insight into how the next stage of the current bubble cycle unfolds.
Interest rates on the benchmark 10-year U.S. treasury have risen from approximately 2% in September of 2017 to the current level of 2.85%. Largely in response to the Fed’s gradual increase in short-term interest rates and their unwinding of the balance sheet (which at least according to data on the Fed’s website does appear to actually be occurring).
(chart courtesy of bloomberg.com)
So should the the Fed keep raising rates and continuing to unwind, there’s every reason to believe that bond and mortgage yields will continue to climb. And we’ve seen over the past two months how the stock and real estate markets have responded to a rising interest rate environment.
Much like the Austrian School explained many years ago, in the same way that stock and real estate prices surge when the money is being printed, you naturally get the opposite effect when the money is taken away. Which is what’s happening now.
This is why perhaps even more so than usual, there will likely be a lot of attention around the Fed’s actions and statement this week. Because if the Fed is really going to continue raising short-term rates and normalizing the balance sheet, that would not be good news for the stock and real estate markets.
As rates have risen near 3% we’ve seen some of the first significant declines in the stock and real estate rallies over this past decade. There were large investor outflows from the stock market, with evidence that real estate may be cooling off as well.
Is this enough to confirm that the bubbles are finally about to crash?
No. But it is possible that we’re entering the next stage of the cycle.
It’s important to remember that as obvious as things may seem at times, not every market participant factors in the same information in the same way and at the same time. And there’s also a level of manipulation in today’s markets that’s wildly beyond anything I ever could have dreamed possible.
Yet if the Fed is going to continue to tighten, while China continues moving away from the petrodollar regime, pressure on the stock, bond, and real estate bubbles should be expected.
For quite a while it’s really just been a matter of time. That’s actually the easy part to see. As the national debt passes $20 trillion, the media coverage is now already talking about a $30 trillion target. And still there’s little effort to do anything about it. Except just pretend it’s not happening and hope no one will notice.
Which is why for the past decade I’ve generally seen two primary likely outcomes. Either that the Fed would simply print the system into oblivion, or else eventually just allow the markets to crash. Which in either case I always felt like it made more sense owning precious metals rather than paper dollars or treasuries.
Because even in the scenario that the Fed contracts the money supply and allows rates to go up, based on how much debt and credit have been created at the point, I’ve always just felt that this crash would be the one that finally knocks out the dollar system as we know it. And if the dollar is failing, again I would much rather own precious metals.
So what the Fed does and says this Wednesday will give us all some clues about the direction and timeline these events will take. And should they signal that they plan to be as, or more aggressive than previously indicated, watch out in the stock and real estate markets.
