US FED PLAYING WITH FIRE – BUBBLES MAY BURST WHILE BOND YIELDS & METALS RALLY – January 12, 2022
The US Federal Reserve’s tightening monetary policy from a historically low-interest rate has slowed the US stock markets. As a result, traders quickly attempt to adjust their capital allocation levels as risk assets, technology, and US major indexes roll lower because of expected Fed Rate Hikes and other Hawkish activities.
We will explore how the US Fed’s comments and potential future actions may prompt significant market trends in 2022 and beyond. We’ll also attempt to identify how and when the US Fed may disrupt the US markets. We know the actions of the US Fed will prompt some significant trends over the next 12 to 24 months. We know certain assets will likely rise in value as fear settles into the markets because of rising interest rates and deflating asset bubbles. It is just a matter of understanding how the speculative asset bubble of the past 8+ years and how the US Fed may move to pop these speculative bubbles soon.
ASSET BUBBLES EVERYWHERE, THE GLOBAL MARKETS CONTINUE TO FROTH
Asset bubbles, such as those created in Cryptos, the US stock market, US Real Estate, and the art/collectible market over the past 5+ years, have visualized the US Fed’s easy money results in terms of bubbles.
Take a look at this chart showing the growth in certain asset classes since the start of 2019. It is incredible to think that these asset classes have rallied so far and so fast in just over 35 months:
- The Grayscale Bitcoin ETF rallied more than 1200%.
- The Technology sector rallied more than 200%. Real Estate rallied more than 85%.
- The S&P 500 rallied more than 94%.
The US Federal Reserve’s move to lower interest rates after the 2018 market collapse, which resulted in a December 24, 2018, Christmas Bottom, prompted an incredible rally phase where traders followed the US Fed in piling into assets. As long as the US Fed continued buying assets and kept interest rates near zero, global traders had no reason to fight the US Fed.
IS THE US FED ABOUT TO POP THE BUBBLE FROM THE STRATOSPHERE?
Our research suggests the US Federal Reserve is changing its policy a little late into the game. However, it appears the US and global markets have already “rolled over” in terms of growth trends and expectations. This SPY to QQQ ratio chart highlights that the US markets entered a peaking phase in late July/August 2020 and reached an ultimate peak in February 2021.
S&P 500 PE RATIO SUGGESTS INVESTORS ARE ALL-IN FOR THE NEXT 90+ YEARS
In other words, it appears traders have reached their ceiling in terms of what they believe the US Fed is capable of doing at this stage in the rally. For example, the PE Ratio of the US Stock market ending in 2021 ended just below 30, with a historical high for 2021 near 37. The historical mean is 15.96 – which is still relatively high for the US stock market.
Remember, a PE level of 15.96 means any investor buying in at those levels would need a minimum of 15.96 years of a company handing over “every penny of revenue” to the investor (excluding all costs, payrolls, taxes, fees, and other operating expenses) to cover the PE multiple of the investment. So a PE level of 30, as we see at the end of 2021, suggests that stock price valuation levels are at least 60 to 90+ years ahead of real returns.
The only thing that can change this historic level of speculation in the markets is a deleveraging/revaluation event.
FROM THE US FED’S ACTIONS TO HOW TRADERS SHOULD PREPARE FOR SHIFTING MARKETS
This first part of our ongoing research into the US Fed’s actions and where they are telegraphing their intents will continue. Part II of this article will investigate how traders should read into these shifting markets and where we’re attempting to highlight what has taken place over the past 3 to 5+ years.
We’ve managed to live through an incredible event in history. I can only think of one other time when a global superpower extended this type of credit and support for the worldwide economy. That was the Roman Empire many thousands of years ago.
What we experience over the next 20 to 40+ years could be the biggest and most incredible opportunity of your lifetime. The process of deleveraging all this debt and working all this capital through the global markets over the next few decades may present one of the most incredible investment/trading opportunities anyone has ever seen in over 1500 years.
Look for my Part II to this article, and we’ll continue exploring the current shifts in the US and global stock and asset markets.
FINDING THE RIGHT STRATEGIES THAT WILL HELP YOU NAVIGATE THROUGH BULLS & BEARS
If you have struggled with finding opportunities over the past year or so and want to know which are the hottest sectors, or how to protect and grow your capital, then please take a minute to review my Total ETF Portfolio – Triple-Strategy Trading Plan to help you profit from these big market transitions.
Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.
Author: Chris Vermeulen