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Can the Fed Patch the Bubble It Just Burst?

Aug 20, 2019 | Fred Abadi |

Can the Fed Patch the Bubble It Just Burst?

The Everything Bubble—a stock market, real estate, bond, and debt bubble—is the biggest financial bubble in history. Now it has a serious tear in it, caused by the Fed, which is trying to patch it up.

The needle pricking the bubble was the Fed’s aggressive policies that burst the bond bubble last year. The media never covered this, but our central bank blew up the bubble in bonds through interest rate hikes and $50 billion a month in quantitative tightening. The purple circle in the graph below shows the financial bubble bursting.

In addition, the Fed broke the high-yield credit markets (junk bonds). For over 40 days, not a single company was able to sell a high-yield bond on the open market. The purple circle in the next chart shows the freezing of the junk bond market.

These “incidents” with the financial bubble are why Treasury Secretary Steven Mnuchin went on an emergency phone call with the Fed and the President’s Working Group on Financial Markets at the end of 2018.

It’s also why the Fed did a U-turn, stopped talking about rate hikes, and promised to end quantitative tightening in 2019.

And it’s why the central bank has put rate cuts and quantitative easing back on the table, doing a small rate cut recently, which they quite amusingly called “a mid-cycle adjustment.”

These are desperate attempts to fix the leak and patch the Everything Bubble, but we have yet to see any positive outcome of their efforts. For instance, stocks have been unable to reclaim their bull market trendline.

This has happened twice before: in October 2000 (right before the dot-com bubble burst) and in December 2007 (kicking off the Great Recession).

It’s hard to say if the Fed will succeed this time, but I have no doubt they will introduce extreme measures in an attempt to prevent another financial crisis.

Investors who make the right moves to prepare for those policy changes could make a fortune. We saw that with investors who shorted tech stocks in 2000. That’s a very risky move, though.

Instead, consider a low-risk proposition such as gold. In 2000, gold was just $288 an ounce. Had you timed your investment right, it would have gained over 420% by today. Gold is at $1,500 after rising about 20% in a few months.

Today, gold is on the rise again, and we might see similar returns for investors who prepare themselves for the next recession by investing in gold now. I’ve spent my career preparing for this exact type of timing, and my friends, family, and clients are all in on investment portfolios that will go gangbusters when the markets go bust.

Would you like to get more information about protecting and growing your wealth? Then, I will gladly discuss it with you—with no obligations—if you have a few minutes to do so.

Schedule an appointment with me here.

About Fred Abadi

In his over 14 years in the financial industry, Fred has focused on commodities and precious metals as investment assets. He has penned several articles on topics such as the commodities markets investing in precious metals for retirement accounts. Fred has helped thousands of clients safe-guard their investments with gold and other precious metals. He has been with Gold Alliance for over two years as a leading Sr. Portfolio Manager.