It’s the biggest story in the financial world right now…
On Wednesday and Thursday, the Federal Reserve will meet to discuss monetary policy. Many investors and economists expect the Fed to raise its key interest rate for the first time in nearly a decade.
Regular Casey readers know why this is a big deal…
During the financial crisis, the U.S. government took extraordinary measures to stave off financial collapse. Its defining act during this time was to drop its key interest rate to effectively zero.
It was an extreme act…one that the Fed had never done before in modern history.
Today, we’re almost seven years removed from the financial crisis…but the Fed still hasn’t reversed this radical policy. Its key rate is still effectively zero.
• Interest rates are the price of money…
When interest rates are effectively zero, borrowing money is extremely cheap.
Right now, you can borrow at 4.05% for 30 years to buy a house. That’s less than half the historic average rate for a 30-year mortgage of 8.4%.
Interest rates on U.S. government bonds are also near historic lows. A 10-year Treasury pays just 2.1% today, less than half its historic average of 4.6%.
Everywhere you look, borrowing is ridiculously cheap. Credit card rates are near all-time lows…student loan rates are near all-time lows…and auto loan rates are near all-time lows.
• By making enormous amounts of credit available…
…the Fed has stoked the economy, stocks, and the housing market. There are record highs everywhere:
- Commercial real estate prices are now at an all-time high. Prices are 18% higher than their last peak before the 2008 financial crisis.
- Margin debt, the value of stocks bought with borrowed money, is at an all-time high. It’s 28% higher than its last peak just before the 2008 financial crisis.
- Stocks have nearly tripled from their 2009 lows. The current bull market in U.S. stocks is 79 months old and counting. It’s now the third-longest bull market since World War II.
- Share buybacks, when companies buy their own stock, are on pace to hit a new record this year. Companies often borrow money to pay for share buybacks.
• We call this the “Alice in Wonderland” economy…
These record highs aren’t the result of a healthy economy. They’re a fantasy created by zero interest rates that make it extremely cheap to borrow money.
Since borrowing is ridiculously, laughably cheap, no business idea is too dumb to fund…no $120,000 car goes unsold to someone who can’t afford it…and no overpriced house sits on the market for more than a month.
But now the Fed is finally getting ready to raise rates for the first time since before the financial crisis. It could signal the beginning of the end of the Wonderland economy.
• One brilliant investor is worried…
Ray Dalio, founder of the world’s largest hedge fund and one of the most respected investors on the planet, is worried what will happen if the Fed raises rates.
Dalio’s big concern is that the world is too indebted to handle a rate hike. He thinks it could cause a financial disaster like a stock market crash, or worse.
In a letter to clients earlier this year, Dalio made a comparison to 1937, when the world was in a similar situation of having way too much debt. He explained that the Fed made a huge mistake by raising rates, and it caused the stock market to plummet 50%.
The danger is that something similar could happen if the Fed raises rates today.
• Whether or not the Fed raises rates this week, it’s important to understand the big picture…
This is all a gigantic experiment.
Most people see the Fed as a group of genius economists who know how to steer the economy to prosperity.
This is dead wrong. And it’s an extremely dangerous assumption.
No one, including the people who run the Fed, know how this is going to work out. It’s impossible to know…because we’ve never been in this situation before.
The Fed has never before dropped interest rates to zero and left them there for seven years. The world has never seen cheap money and borrowing on the scale we’re seeing today.
We’re living through the biggest, most reckless monetary experiment in the history of mankind. And it’s likely to end in disaster.
Our advice: put some of your wealth outside the “blast radius” of a financial crisis. We wrote a new book with all of our best advice on how to do this. And we’ll send it to you today for practically nothing…we just ask you to pay $4.95 to cover our processing costs. Click here to claim your copy.
• Your last chance to save $300…
Our deeply discounted “early bird” pricing for the 2015 Casey Summit ends tonight at midnight.
With the “wonderland” economy running on borrowed time, the 2015 Casey Summit is shaping up to be the most important in the history of our firm.
At this year’s Summit, attendees will mingle with a lineup of investing all-stars including Marc Faber, Doug Casey, James Altucher, and Gerald Celente. We hope you’ll join us and these legendary investors to discuss strategies for protecting yourself and profiting in this “wonderland” economy.
It all takes place October 16-18 at the 5-star Loews Ventana Canyon Resort in Tucson, Arizona.
• In today’s mailbag, reader Herman C. asks:
“I have been following Casey Research for some time. I do not care for (nor do I trust) my American bank where I keep most of my cash.
Is there a way I can safely move some of my money to a friendlier environment…while maintaining easy access to it?”
Justin Spittler responds: We dedicated an entire chapter of our new book, Going Global 2015, to explaining the ins and outs of opening a foreign bank account.
It covers, in detail, the advantages and drawbacks to opening a foreign bank account…which countries are best for opening a foreign bank account…and specific details like account minimums and other unique aspects of opening a foreign bank account.
Chart of the Day
Today’s chart shows the level of margin debt on the New York Stock Exchange (NYSE) over the past twenty years. Margin debt is the value of stocks purchased with borrowed money.
As you can see, NYSE margin debt peaked twice in the last twenty years. Once just before the 2000 tech bubble popped, and once just before the 2007-2008 housing crisis.
Today, margin debt has soared to a new record high of more than half a trillion dollars… 28% higher than its 2007 peak.
Delray Beach, Florida
September 14, 2015
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