Bubble Is Not A Bad Word When It’s Reality
It is the belief of many in corporate finance that the near 700 point drop in the market is due to jobs numbers showing jobs being created and wages rising. This has created a fear among investors that the economy is improving, which could indicate the market will be threatened by a rise in interest rates.
Seeing that there were three expected raises this year, we are talking about perhaps one additional raise in rates by the Fed. Why would there be this sudden fear of interest rates rising? Afterall, we’re talking about a current economy where people are employed and earning money.
People having jobs and earning money means people can actually save money. This means banks might actually need to have money in their vaults. It’s been a long time since that needed to be the case.
I’m an 80s baby. Back then, there was actually a benefit to opening a savings account. Banks actually used real money; and as a result, they paid people interest for letting them use it to give to other people. It was like 8%. Now, interest rates are not even 1% and haven’t been 1% for about 11 years.
That means money saved in the bank is actually worth less every day that you save it factoring in inflation. This means if you spend it on something that always is worth the same to you, like your favorite football’s team’s jersey or a comfortable pair of slippers, you’d be “beating the market”.
Now, savings accounts are essentially money given to banks for free to have and do whatever they want with. I have a friend who is fond of French Revolution guillotine style justice who would say this fact warrants that kind of action, but people are like cats and consumerism is their ball of yarn.
It’s A Bubble
Our interest rates have been comically low for over a decade, and it should be of great concern that the raising of interest rates would cause a near 700 point drop in the market. A decade after the worst recession since the Great Depression, our entire economy is again a huge house of cards like pile of debt with basically no collateral to back it up; and factoring in so called tax reform, the fed won’t be able to bail out the institutions whose balance sheets are all counting on those debts being paid. This means that if we collapse, we will
essentially be owned by China.
Are our companies worth anything if the threat that debt might cost more sinks investor confidence this much? More people have jobs (not as many more per year as under Obama but generally they do), and since they have kept their jobs, they have more money which accounts for the increase in consumer confidence. Should the natural reaction to all of this good news be sell everything?
There is a huge media failure here largely because, like most Americans, most in the media don’t know enough about markets. Even worse, those who do know enough are too scared to state what all of these events are actually indicative of. A bubble.
An economic bubble has 5 stages: Displacement, boom, euphoria, profit-taking, and panic. We are currently in the profit-taking stage where those in the know are heeding the warning signs and generally selling out positions and taking profits. Remember, once a bubble is “pricked”, it can’t be inflated again. This near 700 point drop may be that prick.