By now most people realize that the only reason stock markets have done so well over the past few years is because of the Federal Reserve’s loose monetary policy. Low interest rates have spurred companies to issue massive amounts of debt in order for them to be able to buy back their stock shares. In fact, over the past decade the major net purchasers of stocks have been companies themselves, not investors. That’s the reason for the bull market for stocks, and it may soon be coming to an end.
As long as companies are able to continue buying back shares with cheap money they’ve borrowed, the stock market bull run will continue. But now that the Fed has raised its target federal funds rate to 2.25-2.50%, it has become a lot more expensive for companies to borrow money.
While the Fed has halted any further rate increases, it hasn’t signaled that it’s going to cut rates either, and that’s what many market observers are looking for. Rate cuts would make it cheaper for companies to borrow, and would further stimulate what are already record levels of buybacks. So the fact that the Fed last week indicated that it wouldn’t cut rates was seen as a negative sign by markets.
Markets are looking for the Fed to continue cutting rates in order to keep the gravy train going. Without more rate cuts the stock buybacks will gradually come to an end. And for investors and traders who have a vested interest in seeing higher stock prices, that’s not a good thing.
It should be clear that the currently high stock markets are about to see a major plunge. Buoyed by stock buybacks by major corporations and tech firms, current stock market levels are unsustainable in the long term. Investors who understand that and move to protect their assets by hedging with gold will protect themselves during the inevitable crash. Those who deny the reality of the bubble they’re seeing blown right in front of their eyes won’t fare so well.
This article was originally posted on Goldco.