Cheap money has fueled a stock market rally to never seen before heights. This week almost every Index under the sun hit a new all time record high. Just how much longer can this bull market last?
The election day surprise that brought us President Elect Donald Trump has market participants dreaming of drastic corporate tax cuts, easing of government regulations, and dramatic increases in government spending, which has sent equity prices soaring. Small caps are up every single day since the election and 14 consecutive trading days overall. It has been a mind numbing rally.
The stock market has been the place to be since the financial crisis recovery lows of March 2009. President Obama called the bottom for the market just a few months into his presidency... and with just a few months left of his 8 year run - it's still going.
Bonds have also have been performing well amid the easy money policies of every Central Bank in the World.
Corporate debt levels have never been higher. Heck even the European Central Bank is buying corporate bonds these days, including those of the 'junk' variety. Central Banks buying junk bonds? Central Banks manipulating their currency? Central Banks buying their own Treasury bonds? Central Banks buying ETFs? Central Banks have done everything but bought the kitchen sink to get the Global Economy growing again. And while the financial crisis was put in the rear view mirror, another crisis lies down the road.
The cheap, easy policies of the Central Banks have fueled a massive debt bubble. One that has grown exponentially over the last 35 years.
The yield on a 10 year treasury has been falling for 35 years, while the stock market has been doing the exact opposite.
Corporate and Public Debt levels have never been higher.
The massive debt bubbles have been fueled by cheap money.
What happens when cheap money isn't so cheap anymore?
The Trump election has brought the spectre of higher interest rates into reality. The bond market collapse after the election is speaking volumes about what the market expects going forward..... inflation. And with inflation comes the reality of higher interest rates......
.......Higher interest rates you say? What the heck does that mean? Interest rates haven't trended higher in over 35 years. Most people alive today haven't seen interest rates move up.
I hear and see analysts and market commentators talking about how great higher interest rates is for the economy and the stock market. Higher interest rates are supposed to symbolize strength. The economy is doing so well interest rates are rising.
But what about the 35 years of exponential debt growth? What about the distortions created by keeping interest rates near zero percent for almost 8 years?
Cheap money has fueled the biggest debt and asset bubble this side of the Gamma Quadrant. This bubble has been blown by the Central Banks and their accommodative policies. These policies work great when deflation or stable prices rule the day. But when inflation comes rearing its head, cheap money only adds fuel to the fire.
With higher interest rates comes a higher cost for capital. The cheap money era comes to an end. All those corporations using their equity as a piggy bank will find themselves between a rock and a hard place.
I don't agree with the commentary that higher interest rates are good for the stock market. Low interest rates have taken future growth and brought it forward. Higher interest rates will do the opposite and earnings as well as earnings expectations will suffer. If you look back over the last 50 years higher interest rate policy has always led to a recession, never the other way around. The policy response for a recession is always lower interest rates.
In a higher interest rate environment, Interest expenses will increase. Capital will become much more expensive to acquire, the US Dollar will become much stronger. Corporations with large foreign and/or emerging market presence, will see their sales suffer. Emerging markets are already feeling the effects of a stronger US Dollar. It is only going to get worse.
After 8 years of near zero rates. 8 years of unprecedented Central Bank action, the pacifier of cheap money is getting removed. How many 8 year olds still use a pacifier? How do you think this bull market will react?
The stock market is trading higher on expectations of lower corporate tax rates, less government regulation, and more government spending. But come 2017 it will be higher interest rates that Trump them all.