Name a market that's not in a bubble - go ahead, I'll wait. Stock market? No, that's a bubble. Bond market? Yup, that too. Housing market? Mhm, especially that one.
Quite frankly, we are currently in the midst of one of the largest asset bubbles in history. I don't mean to be a fearmonger, but I'm just calling it as I see it. That doesn't mean that the bubble can't keep growing, or you shouldn't invest, it just means you should be careful. Don't bid $200k over ask on a house. Don't FOMO into hype stocks. Just invest wisely.
The real reason for this blog is: who can we thank for this bubble? The answer to that is the Federal Reserve, unequivocally. The current monetary policy from the Fed is an absolute joke and everything they are doing is going to backfire greatly in the future. The chairman of the Fed is Jerome Powell, aka JPow. At the end of the day, he is responsible for the decisions made by the Fed. Ipso facto, JPow is a dick (in my humble, unbiased opinion of course). Let me explain my reasoning.
Market Bubbles
The Fed continues to print money by the billions every month and continues to keep interest rates at 0%. Rates aside for right now, let's look at the printing. The Fed doesn't actually print paper money, what they do is purchase treasury bonds. mortgage backed securities, corporate debt and even ETFs with $0 in their account. To put this into perspective, if you or I tried to buy something with no money in our account, it would get rejected. The Fed is able to do this on a large scale with no issue, essentially making money out of thin air, hence the money printer going brrrrr. Here's their balance sheet:
Now on to interest rates. Several things happen with low interest rates, but let's focus on two for now. One - loans are cheaper. Two - bonds yield tiny returns.
Loans are cheaper. This applies to generic loans, corporate bonds and mortgages. Let's focus on corporate bonds for a second. After the COVID crash, we got to see which companies were swimming naked. In a normal world, these companies would have gone bankrupt. Not only were they saved by the stimulus package, they were also saved by low interest rates. These companies were able to offer corporate bonds (aka debt) at near zero interest rates. Some investors may have purchased these bonds, but guess who is really buying the debt? That's right - the Fed is propping up the market yet again!
What about mortgage rates? Mortgage rates fully depend on the interest rates set by the Fed. Low mortgage rates lead to higher housing prices. So, now the housing market is being inflated. Not to mention Blackrock and other institutions buying up single family homes, further pushing up prices. And who's buying mortgage backed securities? You guessed it! The mother fudging Fed.
Bonds yield tiny returns. Let's say you are an investor. Bonds are yielding 1% returns and the stock market is returning 10%. Which would you rather? Exactly, and just like you, we saw investors move their money to the market in an attempt to increase returns over the past year. Thus, inflating the bubble even further. A fun little stat from Lyn Alden:
Where would the markets be right now without the Fed? We will never really know, but one thing for sure is that we would not be at all time highs. By buying securities, the Fed is artificially propping up the markets and inflating the bubble. As far as I'm concerned, the argument that we needed the Fed to step in after the markets crashed due to COVID was wrong. I mean what happened to the free market? But more so now, we have recovered from the crash, we are at all time highs, why are they still purchasing $125 billion in securities every month? Why aren't they increasing interest rates?Something isn't adding up. Seems like the market would crumble without the Fed.
Inflation
What happens when you print trillions and trillions of dollars in one year? Put simply - the dollar loses value. This inherently makes things more expensive. Have you seen gas prices lately? Grocery prices? Lumber prices? It’s almost laughable, until you remember it’s affecting your pockets. Here's the M2 money supply since 1990:
The Fed has come out and said they believe the inflation is transitory, meaning temporary. I don’t agree. The dollars are already printed. There’s no signs of stopping any time soon. And quite frankly, the market is being propped up by it. They would have to stop printing and start reducing supply (quantitative tightening) before that would even make sense. But until then, inflation is here to stay in my opinion.
And let's not forget - do you really think once a company raises it prices, they will reduce the price in the future? No, they won't. Here's an article from AP outlining price increases and some companies who have already raised prices. This in itself says that the inflation is permanent. Which makes the Fed's stance that much more moronic.
Or perhaps, there's something deeper at play. Who benefits from inflation? The people who own the assets, aka the rich. Just like groceries or gas, assets benefit from inflation as well. The stock market is at all-time highs. House prices are through the roof, with homes going for $100k over ask. Even used car prices, which are a typically depreciating asset, were up 10% in April and another 7.3% in May. Maybe the real reason for all this nonsense is to make the rich richer?
Conclusion
The monetary policy from the Fed is furthering the wealth gap. Inflation is hurting the poor and middle class who need every dollar they earn. Meanwhile, it benefits the rich as their assets continue to grow in value. Not only that, you have the Fed back-stopping the markets and pushing asset prices even higher. Shit's fucked.
All we can do is try to play the game. But the table is tilted. The game is rigged. We can try to invest what we can and enjoy the little scraps they decide to leave us. But with our purchasing power decreasing, it makes it that much harder to have expendable dollars to invest. Our pennies vs. their trillions.
And if they stop propping everything up? The house of cards will crumble. The bubble will pop. The ramifications will be felt across the globe. And who will feel it the most? The poor and middle class.
Maybe the solution really is Bitcoin. Who knows? All I know is...
JPow is a dick.
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Until next time!
P.S. We can't recommend last month's book enough. The Psychology of Money by Morgan Housel was a great read.
Behavior is a huge part of personal finance and this book dives deep into the psychology behind money management, financial decisions and overall wealth building.
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