From the many excellent presentations and conversations I’ve had over the past week, I see these very important puzzle pieces snapping into place together:
Over-extended markets
Everyone here is in violent agreement that asset prices cannot sustain their current levels for much longer. Lower, not higher, prices are ahead. That in itself will make 2018 very different than the past 5+ years.
Tightening central banks
The biggest trend reversal IMO. We’ve had the mother of all sugar highs over the past decade from the injection of $15+ trillion of stimulus into the system by the world central bank cartel. With the central banks now committing to reducing liquidity, we’re about to experience what a junkie in withdrawal feels like.
Rising interest rates
The 30+ year era of falling interest rates is most likely over at this point. With the central banks tightening, rates will go up. But the market is pushing rates higher, too, for several reasons — some of them outside the central banks’ control. We hardly have any investors or traders left who have any experience with a rising interest rate environment.
The end of the Fed “put” — The US Fed has already undergone its changing of the guard, and the ECB will soon follow suit. The new Chairs are much less likely to rescue the markets at every small dip. In fact, there are many reasons why the new leaders would like to see as much of the excess as possible be bled out of the system in order to have more room to maneuver when the next recession hits.
Growing global protectionism
As economic growth continues to remain lower than desired while resources appreciate in strategic importance, the happy expansion of globalization will slow and then reverse. Alliances will strain and fragment, as countries place greater short-term priority on tending to their interior interests. We’re already seeing signs of this in the US’ trade friction with China and its increasingly pugnacious relationship with Russia.
I just don’t see our society ready to enter a new phase of falling asset prices, tightening credit, recession/job losses, and heightened conflict/competition among nations. We’re still being told “everything is awesome” and hoping for more of the same easy money, loose job markets, and government backstopping that we’ve acclimated to over the past decade.
In short: 2018 is going to deliver us a very rude wake-up call from our cozy slumber.
This article has been republished with permission from Peak Prosperity.