A Bubble on Thin Ice
An Inexperienced Herd
A recent Bloomberg article discusses the fact that most traders active today have never known anything but the era of easy money, and wonders how they will handle the potential end of that era. To this it should be mentioned that the widely expected rate hike cycle may well never begin. The economies of industrialized nations have been severely undermined by loose monetary policy for many years. In concert with over-regulation and over-taxation, this has encouraged ever more capital consumption. Continued economic weakness may encourage the Federal Reserve to simply continue with the ZIRP policy, although it appears to be eager to end it.
Once the herd stampedes, nothing can stop it
Photo via pixshark.com
We have last discussed these problems in “The Sick US Economy” and “The Goldilocks Illusion”. As we have pointed out in the latter article, weak economic growth is not necessarily a guarantee that there won’t be any “price inflation”. A scenario in which the Fed will be forced to hike rates in spite of weak economic growth is not unthinkable. If so, then all these inexperienced traders could be in for the shock of a lifetime.
Effective federal funds rate, log scale: many traders have known nothing but the “quasi ZIRP” era and its seemingly forever rising risk asset prices – click to enlarge.
For every individual, price changes of a different “basket” of goods and services are important. A rich “one percenter” won’t even notice if his grocery, utility and health care bills are going up. By contrast, people whose incomes are in the lower quintile will be especially hard hit by rising prices of such necessities.
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