What do rising interest rates and central bank liquidity mean to the average Joe? I ask this question because I am an average Joe, but I have a mind that is not distracted by the things that are meant to distract me. Enough of the same thing and you can recognize a pattern. Social media, substance-altering agents, video games, television, and instant gratification keep the mind entertained, but not educated. Education has many forms, and many of our leaders would like you to think that today’s world is normal.
Anyone who studies economics knows this is far from normal. Educated people know that the general price level is approaching a crescendo as interest rates rise on a debt load not seen in the history of the world. How much farther can prices go before people cannot eat anymore? I am constantly looking for signs around me. Listening to my fellow co-workers at a Fortune 500 company talk about out how expensive even the most basic of goods are, is interesting. If high-priced engineers and finance professionals are thinking this way, I can’t imagine many others in this economy?
This asset price-fueled rally is going to see the punch bowl removed sooner than later in terms of central bank liquidity and asset disinflation. Even Bank of America released a report that shows the end of the central bank liquidity extravaganza. Central bank asset purchases will drop from $4 trillion in 2016 and 2017 to $0.4 trillion in 2018.
The FED usually hikes until something breaks, as has happened many times before. Where is the line in the sand before the FED has to reverse course and cut? The last several weeks it seemingly is around the 3-3.10 % level in the 10-year bond but may be as high as 4%. If blockchain is the revolution, how long can they keep this system alive before it eats us all alive or we kill each other? After all, economics is the allocation of resources. Most wars are usually over resources and we have a resource problem on this planet.
Some perspective as to how absurd we have gotten is to look at the Dow Jones e-commerce index. This index (with AMZN, GOOG, NFLX, and FB) has gone up by 617%. The entire U.S. tech market capitalization of $6 trillion is higher than all the companies in the Eurozone ($5 trillion). Additionally, Facebook, with 25,000 employees, has a market cap greater than the MSCI of India. The MSCI index of India is designed to measure the performance of the large and mid-cap segments of the Indian market. It holds 79 constituents and covers 85% of the Indian equity market. In 2008, the index crashed 53%, and in 2009, it recovered 94%, which makes sense with central bank liquidity.
Everything went up after 2008. If the system doesn’t blow up for another year, this would be the longest U.S. expansion since the Civil War. Average Joes will see this expansion of credit collapse, and the assets they thought would never go down will correct to fair-market value once again. Fair market value could correct to levels that haven’t been seen in a decade.