By Kris Sayce, editor, Casey Daily Dispatch
They call it the “Everything Bubble.”
Everything is up.
Stock prices. Bond prices. Real estate.
Even gold has gone up in recent weeks.
But the “Everything Bubble” is in trouble.
And one expert says things could get much worse.
In today’s Dispatch, we’ll examine the big risks facing American investors… including the five warning signs that trouble is on the way.
If this is your first time reading the Dispatch, welcome. If you’ve read our content before, welcome back.
At the Dispatch, we have several goals. You might be familiar with these two:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno, Dave Forest, and the founder of our business, Doug Casey.
Regular readers will know that at the Dispatch, when we talk about profiting from ideas, we don’t “follow the crowd.” We aim to help our readers get into big themes before the crowd.
Likewise, we also know that crowds get carried away… and they end up making bad decisions. So we have a third goal:
- To keep an eye on the risks and pitfalls that could hit the crowd, the market, and you at any time… and help keep your wealth safe.
The Five Stages of a “Financial Hurricane”
According to Casey Research expert Nick Giambruno, the financial markets are facing the biggest risks since the 2008 Great Recession.
It’s so severe, Nick says it will be a “financial hurricane.”
And he says it will show up in five stages:
Sky-high stock market valuations
Margin debt problems
Corporate debt problems
President Biden’s corporate tax increase
Importantly, all five of these stages have a common factor: interest rates and earnings. That’s where you need to look for the early signs of Nick’s “financial hurricane” event.
Now, even though many people don’t group interest rates and earnings together, they’re inseparable. As an old boss of mine told me some years ago, “Only two things move markets: interest rates and earnings.”
It’s true. And because of that, it allows you to objectively test if an event really will cause stocks to rise or fall. If the event has a true effect on rates or earnings, it will have a sustained impact on the stock price. If not, it won’t.
We can apply this objective test to Nick’s five stages for the “financial hurricane.” Each of these problems has its origin in interest rates. In particular, the low rates imposed by the Federal Reserve.
Even President Biden’s corporate tax increase is ultimately an interest rate issue. Low rates pushed up corporate earnings and the wealth of billionaires. Politically, that’s a problem for Biden.
And of course, all these things together have pushed up stock prices to record highs. But don’t let that fool you. It’s a market distortion.
Nick points out that low interest rates have caused companies and investors to make decisions they may not otherwise make (hence the distortion). That includes taking bigger risks.
In the case of companies, that means borrowing more to invest for growth (Nick lays out all the evidence for this here). In the case of investors, it means investing in riskier assets to achieve the same or similar returns as before.
But as with all market distortions, it eventually ends.
We’ve Seen This Play Out Before
That’s the risk that Nick is concerned about today.
That a small increase in interest rates… or even the fear of an interest rate increase… will cause stocks to fall. Not only that, but the higher interest rates will increase the debt burden for businesses and investors.
Just think back to 2018. The Fed increased interest rates by more – and sooner – than the market expected. The result was the S&P 500 fell from an index value of 2,929 in September 2018 to a low of 2,408 in December 2018.
That’s an 18% drop. Perhaps that doesn’t seem like much compared to the February to March drop last year, when the market fell 33% in just over a month.
However, remember that the main reason stocks didn’t fall further in 2018 was because the Fed stopped raising interest rates.
Then in July 2019, the Fed cut rates… pushing stocks up to what was then a record high in February 2020.
You see that relationship between stocks and interest rates?
And don’t forget the earnings. Higher rates, at least in theory, means lower earnings for companies. That’s because companies have to set aside more for higher interest payments, which hurts profit margins.
Plus, it means indebted consumers may have less disposable income.
It goes to show how everything is related to interest rates and earnings… and what the market believes that will do to stock prices.
In our view, it will pay to heed Nick’s warning. Stock prices are high right now, but it’s hard to argue against the idea that a “financial hurricane” is brewing.
We advise investors to take the appropriate steps to protect their wealth. The first step is to check out Nick’s special briefing right here.
Editor, Casey Daily Dispatch
P.S. Let’s not forget the other issue that has a big impact on interest rates and earnings – inflation.
That’s a whole different part of the same problem. We’ll explain more in tomorrow’s Dispatch.
Until then, check out Nick Giambruno’s latest research. Nick goes into more detail on the five stages that will ultimately bring about the next market collapse. In our opinion, it’s required viewing.