Low interest rates are fueling much more than just housing and zombie corporations, but earlier today housing data came across the wires. The Case-Shiller 20-city composite home price index saw an 11.9 percent year-over-year increase in the month of February. This reading is the highest since 2014. With respect to the national home price index, the year-over-year increase was also at 12 percent. This is the highest reading since 2006. It is interesting to note that the time period of reference is just prior to the GFC when the housing market peaked.
The Kapital News has been mentioning how the current environment is likely going to have to contend with a triple whammy or trifecta of serious economic and financial issues. For one, the trade wars, supply disruptions, and fiscal policy measures are highly reminiscent of the causes of the Great Depression of the 1930s. Secondly, there is a fascination and outright obsession with big tech names, SPACS, and cryptocurrencies, where the crowd claims that these assets can only experience price appreciation. Thus mirroring the Dot-com era. And lastly, with residential real estate prices moving as they have been over the prior year and likely to continue in this manner for at least the remainder of this year, will generate data points not seen since the peak of the housing bubble in 2006, which led to the GFC. So, it should be highly evident that risks abound and that such price appreciation across the spectrum of asset classes is due in large part because of low interest rates, fiscal policies, and monetary policies. All of which cannot last forever, so it begs the question, when will it let up, and when it does, what will the fallout look like?
Not only are low interest rates fueling asset prices higher, they are also creating new zombie corporations, as well as continuing to prop up existing zombies. If market forces were allowed to prevail, as opposed to distortionary interventions via the government and central bank, then these firms would have gone out of business and/or restructured. This would have been a net-positive for the long-term health of the economy. Yet due to such monetary and fiscal policies, these poorly managed companies were given a life-line, and it came in the form of easy money and cheap credit via low interest rates. The existence of these firms will stunt future growth and prosperity because these firms will have to allocate a disproportionate amount of their cash flows to servicing debt as opposed to capital expenditures, investments, and hiring. This is at complete odds with one of the dual mandates of the Federal Reserve and that is achieving full employment. Well how can full employment be achieved if a significant portion of US firms are classified as zombies? This figure is now nearing 25 percent! This is a question that needs to be asked and answered.
Lastly, because the worlds of economics, politics, and social issues are always intertwined, there exists risks and opportunities within any environment. However, given the current climate, it is reasonable to assume, and recent geopolitical events would indicate that there are more risks than there are opportunities. It is simply not logical to believe that a global debt crisis can be managed or solved by increasing the amount of debt into the system. This faulty logic along with the subsequent policies that are implemented, give rise to a lot of social movements, and increase the likelihood of global conflict. This conflict can be internal to countries or it can be between and amongst nations that can turn into war. Revolutions are fought on empty stomachs. And when one accounts for increasing food prices, commodities, and security threats, coupled with pandemic lockdowns, lack of future opportunities, and many people being priced out of various markets, then it is rather easy to connect the dots. The global system is extremely fragile right now on many fronts, and thus it will only take the slightest of internal or external shock(s) to bring it all down. Stay diversified, stay vigilant, and stay with The Kapital News. #Economy #Inflation #FoodPrices #Protests #Revolution #USA #Liberty #EndTheFed #Leadership #bananarepublic #FireCongress #Gold #Silver #Commodities #Peace