When your mail carrier, hairdresser and favorite bartender are all talking up Tesla and trading on margin, the market’s apex looms. When a broker friend was saying how margin trades are at an all-time high, we both agreed the red flag had been hoisted to full mast.
The Federal Reserve says it will raise interest rates three times in 2022, which will cool the economy and with it, the stock market.
Thanks to unprecedented stimulus spending, it unleashed the highest levels of inflation in nearly half a century.
Recent optimism over the market was hard to dismiss as the S&P 500 returned 16.4% per year over the last decade and reaped 28.7% counting reinvested dividends in 2021.
What many are soon to learn is that for over half a century, the S&P 500 has risen annually by an average of 7.2% meaning every decade you would double your money. This was nothing like recent times, but certainly normal by mean-reversion standards.
Most have never experienced an authentic bear market that is prowling just around the corner. Thanks to unprecedented stimulus spending, it unleashed the highest levels of inflation in nearly half a century. The longstanding inflation yardstick is five percent. The last time it was at five percent was in the 1970s. November’s inflation rate hit 6.8% capping seven months with inflation above 5%.
Markets have never been infatuated with inflation.
As rates rise, companies will go bankrupt as they try to refinance their debt as credit will dry up. It will set off a wave of bankruptcies.
Thanks to more speculation than the roaring 1920s, that has merged with the overvaluation of the 1990s and compounded by the geopolitical Cold War of the 1970s, this should be a very interesting year.
With interest rates near zero and The Fed making history by purchasing corporate bonds for the first time ever, it has resulted in some companies going deeper into debt. With weak sales, coupled with rising interest and inflation rates, their day of reckoning looms.
In the quest by The Fed to raise interest rates in order to slow inflation combined with junk bonds returning negative rates, many companies (which my broker friend likes to call "zombies") will not survive. As rates rise, companies will go bankrupt as they try to refinance their debt as credit will dry up. It will set off a wave of bankruptcies.
Treasury Secretary Janet Yellen claims inflation is temporary. Then again, what isn’t temporary? Sadly, we continue to steal from Peter to pay Paul with Mary’s future. The assurances of the Biden administrations that inflation somehow “transitory” is false. History tells us great societies typically fall because of too much debt.
That 36% proliferation rate of green backs means every dollar you hold in your account is worth less than it was yesterday. To put things further in perspective, a dollar in 2022 is worth just 15% of what it was in 1972. And $100 in 1950 is equivalent to $1,127.
High inflation has dropped its anchor and will certainly exceed The Fed’s 2% target while corporate debt has nearly doubled. Can you spell bubble?
The bubble would have already burst if it were not for the ongoing stimulus that over the past two years saw the money supply increase by $6 trillion. That 36% proliferation rate of green backs means every dollar you hold in your account is worth less than it was yesterday. To put things further in perspective, a dollar in 2022 is worth just 15% of what it was in 1972. And $100 in 1950 is equivalent to $1,127.
The old adage that timing the stock market is futile – not only lives, but is creed. Many believe they can and try to sell others that they are able, but no one can successfully time the market. However, paying attention to the warning signs can shed light where little exists.
No matter what The Fed does, a recession looms. The Fed can’t keep inflation in check without raising interest rates. And it can’t keep interest rates from leveling the economy without more stimulus handouts. Such policy will lead to even higher inflation and usher in a recession.
In order to do battle with inflation in the nation you must be a scholar with a dollar and have those market stop losses anchored in place.
There is no other way.
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