Justin’s
note: Today, we hand
the reins to Casey Report chief analyst Nick Giambruno, who
has an important message.
Nick says the
Federal Reserve is set to pop the “everything bubble.” When it does, it will
trigger a market collapse of epic proportions.
Below, Nick
explains why the coming crash could happen before the end of Trump’s first
term… And how you can start preparing yourself now.
By Nick
Giambruno, chief analyst, The Casey Report
I think there’s a
very high chance of a stock market crash of historic proportions before the end
of Trump’s first term.
That’s because the
Federal Reserve’s current rate-hiking cycle, which started in 2015, is set to
pop “the everything bubble.”
I’ll explain how
this could all play out in a moment. But first, you need to know how the Fed
creates the boom-bust cycle…
To start, the Fed
encourages malinvestment by suppressing interest rates lower than their natural
levels. This leads companies to invest in plants, equipment, and other capital
assets that only appear profitable because borrowing money is cheap.
This, in turn,
leads to misallocated capital – and eventually, economic loss when interest
rates rise, making previously economic investments uneconomic.
Think of this
dynamic like a variable rate mortgage. Artificially low interest rates
encourage individual home buyers to take out mortgages. If interest rates stay
low, they can make the payments and maintain the illusion of solvency.
But once interest
rates rise, the mortgage interest payments adjust higher, making them less and
less affordable until, eventually, the borrower defaults.
In short,
bubbles are inflated when easy money from low interest rates floods into a
certain asset.
Rate hikes do the
opposite. They suck money out of the economy and pop the bubbles created from
low rates.
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It Almost Always Ends in a Crisis
Almost every Fed
rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always
filters back to U.S. markets.
Specifically, 16
of the last 19 times the Fed started a series of interest rate hikes, some sort
of crisis that tanked the stock market followed. That’s around 84% of the time.
You can see some
of the more prominent examples in the chart below.
Let’s walk through
a few of the major crises…
• 1929
Wall Street Crash
Throughout the
1920s, the Federal Reserve’s easy money policies helped create an enormous
stock market bubble.
In August 1929,
the Fed raised interest rates and effectively ended the easy credit.
Only a few months
later, the bubble burst on Black Tuesday. The Dow lost over 12% that day. It
was the most devastating stock market crash in the U.S. up to that point. It
also signaled the beginning of the Great Depression.
Between 1929 and
1932, the stock market went on to lose 86% of its value.
• 1987
Stock Market Crash
In February 1987,
the Fed decided to tighten by withdrawing liquidity from the market. This
pushed interest rates up.
They continued to
tighten until the “Black Monday” crash in October of that year, when the
S&P 500 lost 33% of its value.
At that point, the
Fed quickly reversed its course and started easing again. It was the Chairman
of the Federal Reserve Alan Greenspan’s first – but not last – bungled attempt
to raise interest rates.
• Asia
Crisis and LTCM Collapse
A similar pattern
played out in the mid-1990s. Emerging markets – which had borrowed from
foreigners during a period of relatively low interest rates – found themselves
in big trouble once Greenspan’s Fed started to raise rates.
This time, the
crisis started in Asia, spread to Russia, and then finally hit the U.S., where
markets fell over 20%.
Long-Term Capital
Management (LTCM) was a large U.S. hedge fund. It had borrowed heavily to
invest in Russia and the affected Asian countries. It soon found itself
insolvent. For the Fed, however, its size meant the fund was “too big to fail.”
Eventually, LTCM was bailed out.
• Tech
Bubble
Greenspan’s next
rate-hike cycle helped to puncture the tech bubble (which he’d helped inflate
with easy money). After the tech bubble burst, the S&P 500 was cut in half.
• Subprime
Meltdown and the 2008 Financial Crisis
The end of the
tech bubble caused an economic downturn. Alan Greenspan’s Fed responded by
dramatically lowering interest rates. This new, easy money ended up flowing
into the housing market.
Then in 2004, the
Fed embarked on another rate-hiking cycle. The higher interest rates made it
impossible for many Americans to service their mortgage debts. Mortgage debts
were widely securitized and sold to large financial institutions.
When the
underlying mortgages started to go south, so did these mortgage-backed
securities, and so did the financial institutions that held them.
It created a
cascading crisis that nearly collapsed the global financial system. The S&P
500 fell by over 56%.
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• 2018:
The “Everything Bubble”
I think another
crisis is imminent…
As you probably
know, the Fed responded to the 2008 financial crisis with unprecedented amounts
of easy money.
Think of the
trillions of dollars in money printing programs – euphemistically called
quantitative easing (QE) 1, 2, and 3.
At the same time,
the Fed effectively took interest rates to zero, the lowest they’ve been in the
entire history of the U.S.
Allegedly, the Fed
did this all to save the economy. In reality, it has created enormous and
unprecedented economic distortions and misallocations of capital. And it’s all
going to be flushed out.
In other words,
the Fed’s response to the last crisis sowed the seeds for an even bigger
crisis.
The trillions of
dollars the Fed “printed” created not just a housing bubble or a tech bubble,
but an “everything bubble.”
The Fed took
interest rates to zero in 2008. It held them there until December 2015 –
nearly seven years.
For perspective,
the Fed inflated the housing bubble with about two years of 1% interest rates.
So it’s hard to fathom how much it distorted the economy with seven years of 0%
interest rates.
The Fed Will Pop This Bubble, Too
Since December 2015,
the Fed has been steadily raising rates, roughly 0.25% per quarter.
I think this
rate-hike cycle is going to pop the “everything bubble.” And I see multiple
warning signs that this pop is imminent.
• Warning
Sign No. 1 – Emerging Markets Are Flashing Red
Earlier this year,
the Turkish lira lost over 40% of its value. The Argentine peso tanked a
similar amount.
These currency
crises could foreshadow a coming crisis in the U.S., much in the same way the
Asian financial crisis/Russian debt default did in the late 1990s.
• Warning
Sign No. 2 – Unsustainable Economic Expansion
Trillions of
dollars in easy money have fueled the second-longest economic expansion in U.S.
history, as measured by GDP. If it’s sustained until July 2019, it will become
the longest in U.S. history.
In other words, by
historical standards, the current economic expansion will likely end before the
next presidential election.
• Warning
Sign No. 3 – The Longest Bull Market Yet
Earlier this year,
the U.S. stock market broke the all-time record for the longest bull market in
history. The market has been rising for nearly a decade straight without a 20%
correction.
Meanwhile, stock
market valuations are nearing their highest levels in all of history.
The S&P 500’s
CAPE ratio, for example, is now the second-highest it’s ever been. (A high CAPE
ratio means stocks are expensive.) The only time it was higher was right before
the tech bubble burst.
Every time stock
valuations have approached these nosebleed levels, a major crash has followed.
Preparing for the Pop
The U.S. economy
and stock market are overdue for a recession and correction by any historical
standard, regardless of what the Fed does.
But when you add
in the Fed’s current rate-hiking cycle – the same catalyst for previous bubble
pops – the likelihood of a stock market crash of historic proportions, before
the end of Trump’s first term, is very high.
That’s why
investors should prepare now. One way to do that is by shorting the market.
That means betting the market will fall.
Keep in mind, I’m
not in the habit of making “doomsday” predictions. Simply put, the Fed has
warped the economy far more drastically than it did in the 1920s, during the
tech or housing bubbles, or during any other period in history.
I expect the
resulting stock market crash to be that much bigger.
Regards,
Nick Giambruno
Chief Analyst, The Casey Report
Justin’s note: If you’re a Casey Report subscriber,
you can access Nick’s specific recommendation for protecting yourself and
profiting during this time in his latest issue: “The Deep State Is Triggering the
‘Greater Depression’ to Sink Trump… Here’s How We’ll Protect Ourselves and
Profit.”
If you’re not a
subscriber of The Casey Report, now is the perfect time to
sign up. By signing up today, we’ll send you a free copy of Doug Casey’s newest
book, Totally Incorrect Volume 2. Keep in mind, this book is so
controversial, we may have to take this offer down soon. Go here to see why.
https://www.caseyresearch.com/casey-daily-dispatch/this-is-how-the-everything-bubble-will-end