You just wandering around for food and you see this fat piece of cheese just sitting on top of that wooden board ripe for the taking. You crawl towards the wooden board which appears to hold some strange metallic device for whatever reason torqued behind the cheese. Something seems wrong. Cheese doesn't usually come this easily and out in the open. It's too good to be true. But it looks like easy cheese. What's the worse thing that can happen? You grab the piece of cheese. Snap.
I have been wandering around looking for investing opportunities in the United States stock market. The economy is apparently better than ever before and easy money is there for the taking. I take a closer look and notice that we're in one of the longest bull markets in history and we just keep going up. The economy looks good on paper but in practice it doesn't feel like ordinary people are doing that good. Something feels wrong. Money doesn't usually just keep coming this easily and this market can't get more bullish, can it? It's too good to be true. But it looks like easy money. What's the worse thing that can happen?
Since the beginning of the year, the markets here in America have looked flawless. Low volatility, steady upward movement. It's the type of stuff that your mom and pop investors salivate over. It's ideal. Too ideal.
I thought at the end of last year that we were finally getting the correction that we were due for, but things suddenly turned around for some reason. The problem with economic markets that "experts" will tend to attribute too much credit to particular events to explain market movements when the market is simply too random and unpredictable.
The economic reason appears to be the Federal Reserve committing to not raising interest rates this year. This reason seem reasonable. As interest rates increase, it becomes harder to borrow money and entities with leveraged debt are put into a tough position where growth is restricted. There are good reasons to keep interest rates low.
But there are also good reasons not to keep interest rates low. With easy borrowing (and some money printing) you can put yourself into a bad position in terms of increasing inflation too quickly. But inflation is apparently low. But interest rates have never been this low for this long. Something here is off. Where is all of that new, borrowed money going? Into chasing asset prices.
Ordinary people don't really benefit too much from lower interest rates. Governments and corporations benefit a lot more. Again, they can borrow at lower rates and then pay very little interest since the rates are so low. Since the rates for a large part of the past ten years were below the rate of inflation, you could simply take that money and put it into any asset with any prospect of growth and make money.
Put that money into investments and easy gains. And just like that the market recovers. I think this was the plan behind this policy, but the real question is how sustainable such a trend is. Inflation is low, because all the new money has been placed into speculative positions. Asset prices are inflated, but consumer goods appear to be on a more stable track for now.
There were also those corporate tax cuts and individual tax cuts that benefited the wealthy more than the lower classes. That freed up some more expendable income to invest in things like housing and in the case of corporations, stock buybacks, which artificially increase the price of stock which is already inflated due to all the money that was put there because how easy it was to borrow.
But borrowing money is a double edged sword. You get too comfortable with levered loans and increasing interest rates quickly give you uncontrollable interest payments. A similar thing happened with adjustable rate mortgages and subprime homeowners. They were barely scraping by and then their rates go up leading to them defaulting on their loans. Similar defaults may happen with corporate loans which appear to be a more sought after asset now due to the regulations put on the market in the last crash.
But we don't want corporations to default on those loans, so the simple answer is to stop raising interest rates which the Federal Reserve did. So, we're good right? If we keep interest rates low, we can just keep going up forever. Well, if the easy money stays locked up in the inflated assets then sure, but people sell.
As all of us in the cryptosphere should know by now, just because an asset looks like an invincible winner doesn't mean that the price won't ultimately collapse once people stop believing that the good times can simply last forever.
But that still leaves me (and frankly everybody else) in a odd position. Because it is hard to find a good reason why the market should go down in the short term, but historically when things become overvalued significantly, they tend to correct. But tend here is the key word. Just because something happens in the past doesn't mean it will happen in the future.
And as this bull market becomes the biggest and baddest in history, we enter uncharted waters. The analogs to the past mean less and less and as time goes on the odds of some random event pushing us off a cliff increases and as it has been for quite a while, the cliff is rather large.
Granted I am no scholar in economics, I do not believe the markets have been tamed and we are just waiting for something bad to happen. It's just an intuition. Knowing me, things won't turn until I actually believe that things will keep going up forever. Which might be awhile...
