Introduction
The US interest rate is still at the highest it’s ever been in the last 20 years, the FED has just begun its third year of quantitative tightening, and, even if slightly, US unemployment levels in the last eight months have been higher than they were in the same period last year.
Given all this, one would have imagined that the stock market – and the financial market in general – would have been the first to the immediate costs of the FED’s victory in its battle against inflation. One would have also expected the price of gold to fall too as the Dollar slowly manages to stabilize its battered buying power. And one would have further speculated that the more risky assets, like crypto such as Bitcoin, would be the last things on investors’ minds of lately.
One could have imagined, expected, and speculated and one would have been wrong. On all three counts, it seems.
During the end of 2021 and the beginning of 2024, stock prices have shot past what many people reasoned probable. The S&P500 rose by over 28% in the six months since October 2021, the Nasdaq by 31%, and the flagship stock of the year, Nvidia (NVDA), gifted its investors an ROI of 90% for the past year. Gold too reached its all-time high of $1731.60 per ounce only a few days ago, on the 21st of March. Bitcoin? Let’s not even go there.
To get an idea of what could happen next, what to expect, and how to prepare ourselves, it might be important to first understand what is pushing market prices higher right now.
With that aim in mind, in this two-part article, we’ll explore ideas and possibilities on what might be behind such an impressive bullish trend, theorize on what could potentially end it or fuel it further, speculate on possible outcomes, and, of course, discuss how to best get ready.
Why are prices rising so much and so fast?
Since none of us has all the answers, in this article, more than others, we are going to have to make use of theories, hypotheses, and a good dose of what-ifs. For now, however, let’s start by a fact: not all prices are rising fast.
Inflation is notably lower than it was last year and, except for the latest little rebound last month, it seems on track to meet the Fed’s 2% target soon.
What is rising – and rising notably fast -, however, is the price of assets across markets. It really does seem like everything is rising to astronomical levels…
…but is it?
We’ll get back to this point soon enough.
Possible causes.
There might be a few possible causes for this all-markets-craze and we’ll view some of them but, beyond that, we can theorize and speculate.
Market expectation of Interest Rates cuts? Could that be the cause?
There is a great sense of confidence in the market expectation that the FED will finally pivot on interest rates this year and Jerome Powell himself has confirmed that he too expects at least three cuts before the year’s end.
Any rate cut would ease corporations’ debt burden, reduce the cost of money, and increase liquidity in the market. These are all positive elements that would make fertile ground for stock market growth.
However, “that ground should not be fertile now”.
The rates haven’t been cut yet and payable interests still stand at their highest level in over 20 years. Then why spend so much on buying assets now when the money to acquire them is bound to cost less in the future (in the form of debt at lower interest)? Just… why?
AI craze, maybe?
At the end of 2022, Opened AI launched Chat GPT which quickly became the fastest-growing consumer app in history with an estimated 100 million monthly users in its first two months of existence. Microsoft, Alphabet, and Meta threw themselves in. Apple and IBM noticed, thought about it for a while, and then followed suit. That was it, the AI craze exploded and grew further and further throughout 2023 and it’s still going now in 2024. Everyone wants a part of it and be part of it at the same time. Even dog food companies are finding ways to stick “AI” somewhere in their name.
People say that during the Gold Rush, it was those who sold the shovels that made the most money. And – by providing its AI-focused specialized software and hardware to virtually all the major players in the sector – Nvidia has undoubtedly become the “shovel seller” of this “AI rush” of ours.
The point is the AI craze has had an extremely contagious effect that has literally moved the markets, once again, with the tech sector in the lead. It is all somehow reminiscent of the “Dot.com bubble” of the 90s and the markets still remember what followed back then.
It could certainly be argued that we find ourselves in yet another stock market bubble and this is what is causing assets’ prices to keep increasing.
Except..
…financial bubbles don’t usually form when interest rates are high and especially not while the FED engages in quantitative tightening and literally “sucks” liquidity out of the system.
Besides, why would the price of gold rise too during a stock market bull run?
Could higher-than-expected earnings reports have caused the highs, then?
Sure they could. But this does not seem to be the case.
As of mid-February this year, 79% of the S&P companies had published their Q4 ‘23 earning report figures. 75% of these have reported figures above estimates, (below the 5-year average of 77%) and, taken as a group, they reported earnings that are 3.9% above estimates (below the 5-year average of 8.5% and also below the 10-year average of 6.7%)
While some have absolutely beaten expectations, the latest earning reports of S&P 500 companies as a whole have been good – very good even – but probably not good enough alone to justify assets at the highest prices ever.
Well, what else could it be? What could have pushed the market barometer so far into extreme greed territory?
If Smart Money is pouring billions of dollars into stocks, gold, and even Bitcoin, it’s because it expects prices to keep rising and we must assume Smart Money is called that for a reason. What is it looking at? What does Smart Money see that may not be so apparent to us?
It might be time to bring some what-ifs into the conversation, I think.
Let’s start with this…:
What if…what looks like extreme greed was in fact extreme fear?
Please, bear with me on this one.
Despite a growing economy and tax revenue, the US Government deficit has increased and keeps increasing year upon year with the national debt reaching the current $34.5 trillion and growing. Furthermore, as we know, since 2022, the interest rate the Government has to pay on that huge pile of debts has also grown higher and higher.
Notoriously, other than attempting to find a solution to the problem, the US government has gotten into the habit of borrowing money (by selling securities such as bonds) to pay for older debts and the interest on them, on top of the money needed for public spending and run the Country. This new debt is then paid in the future by selling more securities and… creating newer fresher debt and newer fresher interests.
However you feel about it, this time, there might be a problem.
More than two years of FED’s quantitative easing have subtracted a huge amount of liquidity out of the financial system, just as they were designed to do. But this also means that there is less liquidity (fewer US Dollars around) that can be spent on things like…
… like buying the government’s debts.
To make matters worse, the expectations of lowering interest rates won’t help make bonds and other Government securities any more attractive to investors. The point is low liquidity may soon become no liquidity.
So…
What if Smart Money was worried that liquidity in the financial system (and the bond market in particular) could dry out completely and the FED could be forced to start printing again?
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