Hello Trader,
In my last email, I outlined some of the stresses that will be put on global markets starting late this year and continuing through next year. These tumultuous events will roil the markets, creating more opportunities to make money than I have seen is a long time.
I'm thinking of the late 1970's and early 1980's when inflation was skyrocketing leading to the Fed crushing inflation. We had two monster trends which created many millionaires and also created a lot of bankruptcies.
The Covid Crisis has led to the most massive easing of central bank policies ever. More than 1987 and more than 2008. This alone will shake the markets.
Let's take a closer look.
The Fed has just pumped about $3 trillion into the economy. But that money floods in different directions, not to everybody all at the same time.
Monetary policy should be looked at from two perspectives: the quantity of money and the price of that money. This year, the Fed and created a tsunami of money and reduced the price to zero. This is a replay of their playbook from 2008.
They are buying anything with bond or note in its name, forcing longer term instruments higher, thus reducing interest rates to absurdly low levels.
The first place it goes is into banks and other financial institutions. So they generally do well in the early stages of an easing.
The second group of stocks that does well are interest rate sensitive stocks. This includes industrials and materials stocks. This group of stocks is often called cyclical stocks because they go up when the business cycle is going and and they go down when the business cycle is going down. As interest rates go down and stay down, these capital-intensive stocks do very well.
But the biggest effect is on debt, not stocks.
The huge amount of easing by the Fed and other central banks is created by the central banks buying debt securities such as treasuries and corporates and mortgage-backed bonds. The effect of all of this overwhelming buying is to drive long term interest rates to low levels.
There is something called the natural interest rate. This is the rate that would exist in a free market where the supply and demand for money are equal. But the Fed is wildly distorting this natural rate. By lowering rates to waaaay below where they should be, the Fed is increasing dramatically the demand for debt. At the same time, they are providing the money for this debt.
So debt is exploding. Federal debt is now larger than the GDP. This level of debt is often given as a level that create stresses in society and puts the US into the Banana Republic. Only a few countries are in debt as much as the US.
Debt can be a good thing when it is borrowed to invest in future business. But the current wave of debt is being used for consumption for governments to largely support the economy due to Covid. But that means it is extremely difficult to pay back the money because it is simply consumed not invested.
Debt increases the risks in society and the current monetary stimulus is increasing risk in society at the highest rate in the US since the Civil War or perhaps the Revolutionary War.
So, as the economy is diving, the Fed is increasing risk in society instead of reducing risk! The problems that led me to write my Financial Crisis Report in March 2019 are not being solved by the Fed but made worse!
The best-case scenario is that the increase in debt merely slows economic growth going forward and the economy struggles to pay off the interest and principal created by the Fed's incentives.
The Worst case is that the debt burden is so high that companies collapse, bringing a debt crisis worse than the depression, causing a depression and massive unemployment and war.
Central banks around the globe have embarked on a program of massive easing leading to a massive increase in debt that will likely lead to a massive amount of defaults and a depression down the road, perhaps as soon as 2021.
Now for the good news. We can make a lot of money from this. I'll be talking more in the future about specific trades to make money from the central bank mistakes.
In the meantime, click here to get more info on Wall Street Winners. (702-718-8588 text Syree) the best place to make money from the situation we find ourselves in. This modestly priced weekly video newsletter gives you what you need to know to make money from the insane Fed policy.
Another great alternative to make massive money is to subscribe to Stock Navigator where you see ALL my personal trades. It's like having a hedge fund in a box!
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Thanks!
Great questions!
Good trading,
Courtney Smith
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