US Fed plays with fire – Bubbles may burst as bond yields and metals rally

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The tightening of monetary policy by the US Federal Reserve from a historically low interest rate has slowed US stock markets. As a result, traders are swiftly attempting to adjust their capital allocation levels as risky assets, technology, and major U.S. indices fall due to expected Fed rate hikes and other Hawkish activity.

We’ll explore how the US Fed’s comments and potential future actions can trigger meaningful market trends in 2022 and beyond. We will also try to identify how and when the US Fed can disrupt US markets. We know that the actions of the US Fed will cause significant trends over the next 12 to 24 months. We know that some assets are likely to rise in value as fear takes hold in the markets due to rising interest rates and deflating asset bubbles. It’s just a matter of understanding how the speculative asset bubble of the past 8+ years and how the US Fed may soon burst those speculative bubbles.

Assets are bubbling everywhere, global markets continue to bubble

Asset bubbles, such as those created in Cryptos, the US Stock Market, US Real Estate, and the Art / Collectibles Market over the past 5+ years, have visualized the results of the easy money from the US Fed in terms of bubbles.

Take a look at this chart showing the growth of some asset classes since the start of 2019. It’s amazing to think that these asset classes have recovered so far and so quickly in just over 35 months:

  • The grayscale Bitcoin ETF rose over 1200%.
  • The tech sector grew by more than 200%. Real estate grew by over 85%.
  • The S&P 500 rose more than 94%.

The US Federal Reserve’s decision to cut interest rates after the market collapse in 2018, which resulted in a Christmas low on December 24, 2018, sparked an incredible phase of rally where traders followed the US Fed. by stacking assets. As long as the US Fed continued to buy assets and kept interest rates close to zero, global traders had no reason to fight the US Fed.

Example of an asset bubble

Source: StockCharts.com

Is the US Fed about to burst the stratosphere bubble?

Our research suggests that the US Federal Reserve is changing its policy a bit late in the game. However, it appears that the US and global markets have already “turned around” in terms of growth trends and expectations. This SPY to QQQ ratio chart shows that the US markets entered a peak phase at the end of July / August 2020 and reached an ultimate peak in February 2021.

SPY TO QQQ chart

Source: TradingView.com

S&P 500 P / E Ratio suggests investors are all included for the next 90+ years

In other words, it looks like traders have hit their cap in terms of what they think the US Fed is capable of doing at this point in the rally. For example, the P / E ratio of the US stock market ending in 2021 ended just below 30, with an all-time high for 2021 close to 37. The all-time average is 15.96 – which is still relatively high for the US stock market.

Remember that a P / E level of 15.96 means that any investor buying at these levels would need a minimum of 15.96 years for a company to return “every penny of income” to the investor. (excluding all costs, salaries, taxes, fees and other operating charges) to cover the P / E multiple of the investment. So a P / E level of 30, as we see at the end of 2021, suggests that stock valuation levels are at least 60 to 90 years ahead of actual returns.

The only thing that can change this historic level of speculation in the markets is a deleveraging / revaluation event.

S&P 500 ratio

Source – multpl.com

From actions of the US Fed to how traders should prepare for changing markets

This first part of our ongoing research into what the US Fed is doing and where it is telegraphing its intentions will continue. Part II of this article will look at how traders should read these changing markets and where we try to highlight what has happened in the past 3-5 years.

We managed to experience an incredible event in history. I can only think of another time when a global superpower gave this kind of credit and support to the global economy. It was the Roman Empire several thousand years ago.

What we are going through for the next 20 to 40 years could be the biggest and most incredible opportunity of your life. The process of deleveraging all that debt and exploiting all that capital in global markets over the next several decades may present one of the most incredible investment / trading opportunities that we have seen in over all. 1500 years old.

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Editor’s Note: The bullet points for this article were chosen by the editors of Seeking Alpha.

About Meredith Campagna

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