Why have stock prices risen so dramatically since the last financial crisis?
There are certainly many factors involved, but the primary one is the fact that the Federal Reserve has been creating trillions of dollars out of thin air and has been injecting all of that hot money into the financial markets.
But now the Federal Reserve is starting to reverse course, and this has got to be the greatest sell signal for financial markets in modern American history.
Without the artificial support of the Federal Reserve and other global central banks, there is no possible way that the massively inflated asset prices that we are witnessing right now can continue.
The chart below comes from Sven Henrich, and it does a great job of demonstrating the relationship between the Fed’s quantitative easing program and the rise in stock prices.
During the last financial crisis, the Fed began to dramatically increase the size of our money supply, and they kept on doing it all the way through the end of October 2017…
Unfortunately for stock traders, the Federal Reserve has now decided to change course, and that means that the process that has created these ridiculous stock prices is beginning to go in reverse.
In fact, according to Wolf Richter this reversal just started to go into motion within the past few days…
On October 31, $8.5 billion of Treasuries that the Fed had been holding matured. If the Fed stuck to its announcement, it would have reinvested $2.5 billion and let $6 billion (the cap for the month of October) “roll off.” The amount of Treasuries on the balance sheet should then have decreased by $6 billion.
And that’s what happened. This chart of the Fed’s Treasury holdings shows that the balance dropped by $5.9 billion, from an all-time record 2,465.7 billion on October 25 to $2,459.8 billion on November 1, the lowest since April 15, 2015
Does anyone out there actually believe that the immensely bloated balance sheet that the Fed has accumulated can be unwound without having an enormous negative impact on Wall Street?
And even more frightening is the fact that central banks all over the planet appear to be acting in a coordinated fashion.
I really like how Brandon Smith made this point…
An observant person, however, might have noticed that central banks around the world seem to be acting in a coordinated fashion to remove stimulus support from markets and raise interest rates, cutting off supply lines of easy money that have long been a crutch for our crippled economy.
The Bank of England raised rates this past week, as the Federal Reserve indicated yet another rate hike in December.
The Europeans Central Bank continues to prep the public for coming rate hikes, while the Bank of Japan has assured the public that “inflation” expectations have been met and no new stimulus is necessary.
If all of this appears coordinated, that is because it is.
When interest rates are low and central banks are injecting money directly into the financial system, that tends to promote economic activity.
But when they raise interest rates and pull money out of the financial system, the exact opposite is true.
For a long time, I have been warning that the only reason why stock prices ever got this high was because of the central banks, and I have also been warning that they could crash the markets if they wanted to do so.
Hopefully, there is nothing nefarious going on, but I do find it very strange that all of the major global central banks are moving toward tightening at the exact same time.
If things go south for the global economy in the months ahead, we will know exactly where to point the blame…
Many more people need to understand what that word really means, and how it applies to pretty much everything in the current human living arrangement. Especially the so-called 'developed' nations.
First: our entire economic model, which dependent on borrowing at a faster rate than income (GDP) grows, is something that simply cannot be maintained at its current rate or level. Check.Second: depleting species, soils and aquifers are all wildly unsustainable practices that are accelerating. Check.Last (and most glaring of all): the world’s leadership (and we use that term very loosely) continues to insist on adhering to the indefensible idea that infinite growth on a finite planet is possible Checkmate.
Said another way, the daily comforting stories we are told about how all of this somehow makes sense are just a load of nonsense. Each is entirely unsupportable by the evidence, facts and data.
What happens when a culture’s dominant narratives are not just unsatisfactory, but entirely unworkable?
Well, for one thing, the younger generations that are being asked (goaded?) to step into an increasingly flawed future begin to resist. Which is completely understandable. They have nothing to gain if the status quo continues.
At the same time, the older generations mostly just settle into a stubborn insistence that everything will be fine if everyone will just do more of precisely what got us into the mess in the first place. Younger people should step up to make sure Medicare/Social Security/pensions remain fully funded, and buy the financial assets and homes of downsizing seniors at top dollar. The boomers have everything to lose if the status quo changes.
Why do I bother to tell you all this? Why have I spent the last ten years of my life trying to alert the public of risks they keep telling me make them uncomfortable? Because I care. Because I hope to help a few people preserve their hard-earned wealth. Possibly even save a few lives with this information. And, ultimately, to help people lead lives filled with greater connection, aliveness and joy.
The key to all of these better outcomes is having a clear-eyed view of "what is", and then being able to predict "what’s next". Which means that understanding is the first step. Informed action follows from that.
In the US, through selfish over-consumption, the baby boomer generation has screwed the prospects for following generations. It's now doing everything to deny and defend its extraordinarily self-serving and short-sighted decisions, and delay the repercussions for as long as possible.
For the record, I seriously doubt the current younger generations would have behaved any differently were we to teleport them back in time The boomers came of age when net energy from oil was still climbing and that ‘taught’ them about ‘how the world worked.’ When you have abundant resources, especially high net energy oil, you can pretty much do anything you want.
Not so much. A BIG fallacy of the past is that wars lead to rapid economic expansion afterwards. A more correct version of this is that the destruction of war leads to rapid recovery and rebuilding ONLY IF you also have access to abundant high net energy oil. If you don't, wars only lead to destroyed economies.
The oft-cited and worried over ‘US federal debt’ of some $20 trillion is the lowest dark-blue shaded area on that chart .It’s not even 10% of the predicament the country faces
No country has ever dug out from under a debt + liability load anywhere close to that amount. It's just too big a hole to climb out of.
With GDP growth stubbornly anemic for going on 12 years now, and no fresh sources of high net energy to fund future GDP growth, we can say this very simply about the promises our politicians are soothingly singing to us:
They won’t be kept because they can’t be kept. It’s really no more complicated than that.
Only one question matters when presented with a chart like this: Who’s going to eat the losses?
The keepers of the status quo, such as Hillary and Trump and their cozy relationships with Goldman-Sachs, et al., want the answer to be ‘the taxpayers’ (and not ‘the banks’). But they'd never publicly admit to that. So they pretend that losses will never matter, and instead promise perpetual prosperity for all.
So people, companies, communities and the entire nation of the United States makes plans and investments as if the above chart didn't even exist.
This is no different than our 80-year-old refusing to draft a will because he simply can't face the reality that one day he'll need one. Such denial and self-delusion make a terrible strategy to live by.
The fact that you live in a world where the leaders of most countries are engaging in willful denial does not mean you have to be a victim to the consequences of their irrational delusion.
This is why having a clear-eyed view of the data, knowing your history, and forecasting the most likely outcomes are critical for positioning yourself for safety.
Those who do this empirically realize that the global economy is far more likely to contract, possibly viciously, before it expands. Given this, today's global equity prices and non-investment grade bonds are absolutely mis-priced for such an outcome -- instead they're practically priced for perfection, and thus due for a major correction.
Last week we issued a report warning of the multiplying number of important indicators signaling a coming market correction and economic recession.
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