Crisis of Confidence

On today’s show we’re talking about factors that could signal global instability and a crisis of confidence in our financial system. What happens if the Fed was to loosen monetary policy before actually beating inflation? This is a realistic scenario that many investors have been predicting.

The hope of many investors, those who are addicted to the loose monetary policy of the last decade, is that we return to the way things were. Asset bubbles feel good on the way up, and they feel terrible on the way down.

The past decade has represented a market distortion that has been promoted by central banks in Europe, the US, Canada, Japan. The list goes on and on. If the central bankers decide to pivot and lower interest rates, the likelihood is that investors in the bond market will not accept to lower interest rates.

You see interest rates are based on one principal factor and that is risk.

When the market yields on Turkish sovereign debt are higher than, say, German sovereign debt, it’s a reflection of the higher risk associated with Turkish government debt than German debt.

When the yield on Netflix bonds are higher than the yield for IBM bonds it’s a reflection that the market perceives higher risk with Netflix than IBM.

The bond market ultimately determines the yields in the market. If the Fed was to slow down their rate of interest rate increases before actually beating inflation, the bond market is likely to respond with a loss of confidence in the Fed.

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Host: Victor Menasce

email: podcast@victorjm.com