The economy has been very quiet. Stocks started out 2016 looking bad and making the economy look unsettling. But stocks have done reasonably well over the last few months.
The Fed has held off raising interest rates, which is really just the interest it pays banks to hold reserves. Maybe the Fed will hike the federal funds rate by one-quarter of a percent in a couple of weeks, but either way it doesn’t tell us much.
We have an election in November which is grabbing the national news. Some people think the economy will hold up well until that time. I hear people say that the Fed isn’t going to allow stocks to crash leading up to the election.
This is giving way too much credit to the Fed. It can’t control the decisions of millions of people. The most the Fed could do is create more money out of thin air in hopes that it props things up for a while longer. But the Fed hasn’t been creating new money since the end of QE3 in October 2014.
History also tells us that stock crashes and recessions are common prior to a presidential election. The economy was terrible in 1980 when Carter had to face off against Reagan. And, of course, the economy tanked just before the 2008 election.
One thing that is a bit strange right now is that there are no obvious massive bubbles, except perhaps stocks. Real estate is a bubble in certain areas such as Silicon Valley. But nationally, housing prices are nowhere near the bubble levels of 9 or 10 years ago, especially when you adjust for the inflation of the last decade.
The oil bubble already crashed, as well as any bubble in precious metals, particularly silver.
And while stocks would get hit hard in a recession, it is interesting that they are somewhat stable right now. This can change quickly. But typically with a bubble, there is a last stage where everything is completely irrational. In 1999, tech stocks were going up at ridiculous rates.
Still, it doesn’t always have to happen this way. The bottom could drop out of U.S. stocks next week without a last major surge. Maybe January 2016 was the last warning for everyone to get out. You can only get so many warnings.
The important thing to remember is that the Fed created a massive amount of money from 2008 to 2014. The adjusted monetary base quintupled over that time. Much of this new money went into excess reserves at the banks, but not all of it. And it is still somewhat inflationary nonetheless.
The Fed has been tight for a year and a half. The Austrian Business Cycle Theory tells us that the misallocated resources will be exposed and a correction will occur. The artificial boom will become a bust.
One of the things that also makes this strange is that there was never that much of a boom, except in stocks. It is almost hard to call the last 7 years a recovery. Unemployment has dropped, but wages have remained stagnant at best. The average American is feeling the pinch with incomes just not going as far as they used to go.
Meanwhile, the national debt continues to grow, and the unfunded liabilities get ignored.
When things are relatively quiet, it is easy to expect that things will just keep humming along quietly. But when things are unsustainable, they must eventually stop.
And based on knowledge of monetary policy and government intervention, we know that our current situation is unsustainable. The debt is unsustainable. The unfunded liabilities are unsustainable.
Do you ever wonder what it was like for people a hundred years ago or more when they didn’t have weather radar? You could have a hurricane just a couple of hundred miles offshore with little warning that it was about to hit you within a day.
There is often a calm before the storm, literally and figuratively. When you see some clouds forming in the distance and the waters start to get choppy, how do you know if a big storm is about to hit?
The answer is, you don’t really know. You just have to be prepared for what you know is possible. You should really be prepared when you know it is inevitable.