The Financial Bubble 2021

the financial bubble 2021

Joe Biden, the newly elected US President is just about to face a number of issues that will be almost impossible to tackle. One of them is the financial bubble 2021.

The social and political divisions in the US cannot be cured by optimistic calls for unity. Then there is the moral duty to do something about the COVID-19 pandemic. In addition, sooner rather than later the President will have to deal with the effects of the largest financial bubble ever in the history of the United States of America.

When I say the largest financial bubble ever I am dead serious about it. We are currently living in the largest financial bubble because it includes almost all available assets thanks to the Federal Reserve.

Reasons Behind the Financial Bubble 2021

The Fed’s Irrational Policy

The Fed willingly encouraged investors to buy overpriced assets. Dealing with the Fed’s irrational policy will be a very difficult task. In fact, it will be of the same magnitude as the gold standard exit in the early 70s was, or dealing with the high inflation numbers in the early 80s.

It will take strong political action and a full review of the country’s monetary policy.

The ex-Fed president and now the US secretary of the treasury will not be much of a help. Mrs. Yellen walked the same path set by Allan Greenspan. Unfortunately, it wasn’t just her, all her predecessors did the same.

Alan Greenspan’s recipe during a crisis was to reduce interest rates and thus extend enormously Fed’s balance sheet.

Every time the Fed intervened to “help the economy” by just lowering interest rates, what it actually did was to set up the conditions for the current bubble and consequently the oncoming financial crisis.

Inflation Gradually Accelerates

Nonetheless, this game is now over. Inflation is slowly picking up and personal spending has risen 1,5% more than expected. Certainly, this is not much but in the middle of the covid19 pandemic that number gives us an indication that it will continue to rise.

The truth of the matter is that nobody paid any attention to these figures as everyone followed the GameStop media frenzy.

The Fed’s Money Printing

the financial bubble 2021

The Fed prints money nonstop. This way it finances a large chunk of the government deficit. The huge amount of money the Fed has created always finds a way to come out of the banking system. At the same time, there are extensive restrictions in the food chain, processing, manufacturing, and in-services.

Free Money is About to End

The oncoming inflation hike will force the Fed to tighten up its monetary policy. The Fed stretches out moves like that will be slow and take time. However, the markets always react before the Fed, especially in a crisis situation as fear takes over.

No matter which way you turn there are signs of a wild derailment. Most investment and market analysts see it coming, except the bankers. It is expected that most types of investments to lose money over the next years.

The Stock Market Bubble

When it comes to the index that really matters, the index that predicts real returns things do not look good. The US stock market is overpriced in fact, its value is similar to 1929, 2001, and just before the 2008 global financial crisis.

All stock market bubbles tend to keep up with fast credit expansion and the credit expansion we are seeing right now is not the exemption. Business debt compared to GDP has exploded over the last few years. One of the reasons for that was the large GDP drop.

In my mind, the stock market bubble that is on its way will be one of the worst ever. That stock market disaster will be the result of the effects of the financial bubble 2021.

In the past, when the stock market was facing difficulties investors had the opportunity to put their money in government bonds. Nowadays this is not viable. Government bonds in Europe and Japan tend to offer zero or negative interest rates. The return of the US bonds is 1,1% right now, which is poor.

It will also be a bad idea for the investor to buy private company debt. Private company debt is also not worth investing in. Their returns are at all-time historical lows. Even the high-risk bond returns have never been lower.

It looks like there will be a time when investors won’t find a place that offers decent returns to put their money.

The Fed Will Take Swift Action

When investors are about to face a financial crisis, the same goes for the Fed and the White House. The Fed’s duty will be to move carefully because nobody wants the markets to panic. If the markets should panic then, billions of dollars could be lost overnight.

the financial bubble 2021

Nevertheless, seeing the oncoming crisis and doing nothing to deal with it is not politically correct. Inflation has a negative impact. It affects the poor more than the rich. A development like that doesn’t do much for social justice, and the politicians will always step up and do something about it. Unfortunately, in most cases what they do doesn’t always work.

Many of you will disagree with me and there is nothing wrong with that. However, in the next few months, we are about to find out how big is the hole the Fed has created. How much it will damage the markets, the bank itself, the ordinary folk out there, and the US.

Final Words

All data indicates that 2021 will be a very interesting year. The financial bubble 2021 built by the Fed will explode with huge implications for the economy and all investors.

When the world’s largest economy gets in trouble then the global economy suffers too. A US financial crisis will turn into a world financial crisis, with stock markets around the world crashing.

Most assets will suffer great losses except for gold and other precious metals. Many market analysts argue cryptocurrencies could also be a safe place to be during those times. I still think cryptos are too unstable but there is a belief that cryptos might attract funds.

Everybody knows gold is a safe haven during bad times. It always has been and it will always be. Every time there has been a crisis situation gold has been called upon to save the day and never disappointed. It always has been and it will always be.

Gold is a non-correlated asset which means when all other mainstream assets take a downturn gold tends to move the opposite way and it actually sees its value grow.

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US-Dollar Backed Gold

US-dollar backed gold

US-Dollar Backed Gold. Is it true and how does it work?  It is common knowledge that the value of the US dollar influences the price of gold. In particular, we can say that sometimes the under-performance of the US dollar backs up gold.

This is exactly what is been happening for the last few days, right after the Fed wrapped up its 2-day meeting, on Wednesday (15 March 2017), the Federal Funds Rate increased by 25 basis points to 1,00 percent. Along with price stability, the Fed is been targeting an inflation rate of 2,00 percent.

US-Dollar Backed Gold

The Fed’s 2,00 percent inflation rate, is now fast approaching and this is exactly what prompted the Fed chair, Janet Yellen, to raise the rates, for the second time since December 2016. The Fed is pushing for monetary tightening in 2017, with at least three rate increases expected for the year. Due to massive job gains and an increase in the US GDP, the rate hike is expected to continue during 2018.

Although currency traders were expecting a US dollar bump from the rate hike, it went the opposite way, and that was due to the fact, that there are more rate hikes to follow. As a result, the US dollar took a dive to a five-month low.

The most interesting development took place after the rate hike and that was the impact on gold bullion. Gold is a dollar-denominated asset like oil, copper, and others. When the dollar tumbles, the price of gold bullion increases. As a result, gold prices rallied substantially, with strong gains and reversing a short-term bear trend. Gold is now trading at $1,245.24 per troy ounce.

Interest rate increases are bad news for Americans. Every time there is an interest rate hike, homeowners, consumers, and others are subject to higher interest repayments. Even though the interest rate hike was by only 25 basis points, it is estimated it will cost the average American household on interest repayment on credit cards, $17.00. The truth of the matter is, that for every increase in interest rates, there is an increase in home loan repayments, as most home loans are variable and they adjust accordingly.

When interest rates are on the rise consumers should shop around for the best deals.