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Wall Street investors are still in a relentless frenzy as stocks go higher and higher. They may have forgotten the risks of investing so much money in companies whose growth is not guaranteed, especially considering that economic conditions keep worsening by the day. They’re truly believing the Fed will always come to the rescue. But the truth is that the days of Fed support are almost over. And when the music stops, this gigantic bubble will burst and the entire financial world will be turned upside down once again. A number of renowned market veterans have been alerting about the growing risks. But so far, no one seems to be listening to their warnings. They have been telling us that even though most people believe this time is different, the current bull market has become unsustainable. Bulls can stand many things, but the slightest sign that a two percent interest rate hike is coming can scare them to the core.
And what many investors may be failing to remember is that the Fed has announced that it will increase interest rates by the end of the year. Based on recent estimates, analysts forecast that the central bank can hike rates by 2.2 percent by December, and that figure goes up to 3.5 percent at the beginning of 2022. Such aggressive increases will come as a result of rampant inflation. Official data points that the inflation rate is at nearly 6 percent. But some economists argue that the true rate of inflation that people are seeing at the stores is ranging between 11 and 14 percent. As the holiday season approaches, inflation will soar higher. Unfortunately, this means that the Fed will have no other choice but to sharply raise interest rates before the economy overheats. And, of course, this will trigger the inevitable stock market crash no one seems to be prepared for.
For years, low-interest rates have propped up equity markets worldwide. They make it more appealing to borrow money to invest in stocks and ultimately push up company valuations. However, today’s valuations are far extended beyond norms, by many measures. Although many want to believe that fundamentals do not matter, the market is cyclical and that’s a universal truth. This means that at some point, valuations always come back to their norms, or, as the hedge fund manager John Hussman explains, everything that goes up must go down. That’s the law of equilibrium.
The speculative frenzy started when the Fed decided to suppress already low-interest rates to near-zero levels. That was when many new investors entered the bubble. Needless to say, when interest rates do rise, these investors won’t stick around. Higher rates are also likely to create disruptions in the economy, with indebted companies struggling to meet higher interest payments. That alone could trigger another recession, but we don’t even have to go that far. In essence, there’s a wide range of different risks that could spark a stock market crash after an interest rate hike. But today’s investors are choosing to ignore the looming dangers for the sake of higher ‘future’ earnings.
They’ve been buying the narrative that the Fed will do “whatever it takes” to avoid a financial collapse and that it will keep fueling stocks through its quantitative easing policies. History has shown us over and over again that there’s only so much liquidity can do. And that narrative is coming to an end, and it will cause unprecedented chaos. If you don’t believe us, just take a look at the Fed’s annual Financial Stability Report, in which central bank officials issued a very explicit warning that the market is in a bubble and extremely elevated asset prices are risking to trigger a broader stock market crash.
In a recent article, Bloomberg reported the highlights of the 85-page document published on the Fed’s website moments after the market closed last week. The central bank warned that “prices of risky assets keep rising, making them more susceptible to perilous crashes if the economy takes a turn for the worse” adding that “asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall.” This is proof that they already know what is coming next. They already know that there’s no escape. For how much longer will we continue to ignore the red flags? The Fed keeps pretending for the public that everything will normalize soon, but those who witnessed previous bubble bursts are telling us that the stage is set for another massive financial meltdown. It is clear that a brutal stock market crash is fast approaching. The final question is: who are you going to believe this time?