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Successful investors must answer three questions: Will we have serious inflation? Will interest rates increase? Will stock prices fall?
The government wants us to believe that it is in control, and that the future remains bright. The recent “Federal Reserve rally” attests to the effectiveness of this gaslighting. If we stop believing the illusion, the economy and stock market will crash.
It’s all about confidence. Paper money is called “fiat currency” because it only works by fiat, which Webster defines as an arbitrary order.
Here’s a quick quiz to test your confidence. Which of these statements are true?
A. Raising interest rates slows down an overheated economy, but our economy is not currently overheated.
B. Inflation causes increases in interest rates.
C. Fed “tapering” (reduction in bond purchases) reduces new money flow, slowing down the pace of inflation. When you find yourself in a hole, stop digging.
D. Current inflation is demand-pull caused by pandemic-induced supply chain disruptions. It is transitory.
E. Classic cost-push inflation is also causing increases in prices. It’s caused by insane money printing during the past decade. This is not transitory. It will continue growing and will last a long time.
F. The Federal Reserve controls interest rates. It is the “Wizard” behind the curtain.
All the above statements are true, except the last statement (F). The Fed can try to control short-term interest rates, but not longer-term rates, and its ability to control anything is currently extremely limited because it has created an inflationary problem that is surging out of control.
In other words, statements (A) through (E) above will happen with or without the Fed’s intervention. We are destined to see serious inflation and rising interest rates. The Fed is trying to make us believe they “control” the inevitable because economic stability requires control or the illusion of control.
The end of ZIRP
What are your answers to this quiz? Do you believe the Fed is in control and will limit inflation? What happens when tapering causes increases in interest rates, ending Zero Interest Rate Policy (ZIRP)? Here’s my view:
1. The end of ZIRP allows interest rates to increase. Inflationary forces cause large increases. Bond prices plummet
2. Investment analysts discount future earnings on stocks at higher rates, reducing “fair value.” Stock prices plummet.
3. Interest on the Federal debt increases, requiring some combination of increased taxes, reduced Federal spending for other expenses and more money printing.
The accomplice
Wall Street does all it can to keep the party going, with statements like “Don’t fight the Fed.” Greed and fear are powerful motivators. Greed is currently winning – but stay tuned.
Conclusion
There are plenty of warning signs that a serious market crash lies ahead. Ignoring these signs can be catastrophic. Investors should move to inflation protection with investments like TIPS, precious metals, commodities, and cryptocurrencies.
Baby boomers should be critically concerned because most are currently in the “Risk Zone” when investment losses can ruin lives. Baby boomers do not have time to recover from the next stock market crash. That’s why I wrote the book Baby Boomer Investing in the Perilous Decade of the 2020’s.
Ron Surz is co-host of the Baby Boomer Investing Show, president of Target Date Solutions and Age Sage and CEO of GlidePath Wealth Management.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
