Central bankers around the world are playing a dangerous game.
They’re taking action to ensure a global economic expansion… without calculating the consequences.
This has given rise to one of the largest bubbles in history — one that will not only affect stocks and options, but also many other asset classes.
Everywhere I look in the market, I see inflated prices… and I’m not comfortable buying at these levels.
Sure, the market continues to march forward and make all-time highs… and traders think that’ll continue into the year-end.
The thing is, a majority of the market is short-sighted, they don’t think about what happens further down the road.
Over the last decade, the Fed and other major central banks have kept interest rates at rock bottom levels to bolster the global economy. This fueled the current asset bubble we’re in.
Not only that, but the easy money policy has encouraged massive amounts of leverage…
So much so that total debt has topped $250 trillion.
At some point, the bubble will burst and the zombie companies could drag down growth. What happens then?
If you think the 2008 financial crisis was bad… the next financial crisis will make the housing bubble look like a walk in the park.
The Fed is not looking to raise interest rates in 2020. While traders loved that news in the last FOMC meeting, they are forgetting about the consequences of extended periods of easy money. It’s the makings of the next big financial crisis.
When interest rates are so low… what do you think consumers and corporations do?
They continue to take on massive amounts of debt because it’s just so darn hard to pass up. That’s probably why total debt has reached historic levels this year. There’s no longer a risk of the Fed creating an asset bubble… it’s been inflating for more than a decade now.
When you look at the total credit to the nonfinancial sector, a great indicator of total world debt… it looks like the global economy is in trouble.
The easy money policy has caused a massive rise in this ratio in the aftermath of the 2008 financial crisis. Right now, the levels are so elevated, and that’s a smoke signal indicating the market could crash.
Think about it like this… when interest rates are so low, the Fed doesn’t have any room to move. Instead, they may look for different ways to stimulate the economy… like negative interest rates (which is exactly what’s going on in Japan).
If you look back to the financial crisis back in 2008, the Fed had quite a bit of room to move to stimulate the economy with rate cuts. But right now, the Fed Funds rate sits at 1.75%… down from 2.25% last year.
With U.S. stock prices sitting at all-time highs and trillions of dollars worth of bonds yielding negative interest rates… I wouldn’t be surprised if history repeats itself.
Problems With Liquidity
I’m sure you’ve already seen the headlines about the repo market. The Federal Reserve Bank of New York added $86.4M in liquidity to the financial markets recently. The Fed’s balance sheet has risen to a whopping $4.1T… and there have been about $213B in repo interventions.
If this rises significantly and banks suck all the liquidity out of the central bank… it’s going to be a problem.
These money-market operations are designed to help the financial system with liquidity issues and leave short-term borrowing rates stable. Of course, the Fed has told everyone that there are no broader economic implications.
But what happens in a crash scenario when eligible banks need liquidity?
Will it become a problem then?
I think so.
Especially in the year-end, banks will be moving money around and some banks may choose not to lend when there’s high demand… and this could cause the money-market rates to ramp higher. If they do, they’ll have to dump U.S. Treasuries, and if you don’t think that’ll affect the markets…
Traders are greedy right now… and that tells me I should be fearful. However, rather than staying on the sidelines, I’ve come up with a new strategy to profit from the next big meltdown.