Disclaimers and Crashes
Disclaimers inform investors that previous performance is no guarantee of how a financial investment will perform in the future. Analysts and financial commentators and observers, including this Newsletter, also furnish disclaimers that absolve them of any responsibility for what they reckon will take place in the markets. In other words, all those peddling financial instruments assume no responsibility for future performance of the same, and all those daring to predict how markets will react decline to cover any losses that may result from investors following the advice proffered.
Investors are responsible for their decisions, and that includes any losses suffered by asset managers that invest the capital of their clients. In fact, investors change asset manager when there are losses. Likewise, investors will not heed the advice of commentators who never get anything right.
There is justifiable fear that the Fed will again get it wrong this time as well with its policy of successive interest rate rises and readjusting its unbalanced balance. In the past the Fed has brought about numerous recessions with its manipulation of interest rates, which is an argument for abolishing the Fed altogether. On the other hand, the ability of the Fed to create fiat money can be useful as it was in 2008 when it saved the banking sector from self-destruction.
The real problem is that the US Government has spent more than it should and has debts that are about 104.5% in relation to GDP. The Fed has experimented with QE and found that the economy is hardly reacting any more to huge injections of liquidity, and even ZIRP and NIRP stimulate growth very little. So the academicians have decided that it is necessary to raise interest rates so that they can be lowered when the next recession starts. That theory is reasonable in itself but only if put in effect over a long time span. Instead the Fed is moving too fast. Festina lente.
What is to be expected is a recession accompanied at a certain point by a stock market correction or crash, given the widely accepted view that equity prices are disconnected from reality. The bond market will be volatile due to rising interest rates and the Fed`s balance trimming. That means yields will rise as prices in the secondary market fall rapidly. EM dollar debtors will be hard pressed, and defaults are to be expected. It remains to be seen how much longer the central banks will be able to manipulate the gold price in an apocalyptic scenario of turbulent stock markets, careening bond markets, stifling debt and mad amounts of derivatives.
Walter Snyder