Before the recent Federal Reserve meeting, hedge fund manager Ray Dalio warned Fed officials to be cautious about raising interest rates. Otherwise, they could trigger a nasty recession like that of 1937.
Of course, we all know that the Fed has no plans to raise rates significantly in the near future.
And when it was clear that any prospect of more than a tiny rise in short-term rates had been postponed until 2016, the market rejoiced.
Well, I’m convinced that the celebration is a bit premature.
What’s happening at the Fed is merely diverting our attention from the true threat to the market. As you’ll see, a 0.25% increase in the federal funds rate could be the least of our concerns.
The Market Is Missing a Key Point
The Nasdaq Composite Index recently jumped over 5,000. The last time it reached these heights, it was the year 2000… right before the dot-com crash.
Now, when that benchmark was hit recently, the chairman of the Nasdaq came out and explained how today’s market was very different than that of 2000.
Supposedly, we’re currently experiencing far less speculative activity and over-optimism.
That might be true, but when you consider the state of the world today versus that of 2000, the opposite appears to be the case…
- At the time, the Middle East was the world’s most turbulent region. The principal risk was an aging dictator who had modest amounts of weapons of mass destruction. Yet he was generally isolated from the world.
- Russia, too, was more or less a basket case in 2000, with a gross domestic product (GDP) the size of Denmark – not to mention a new, untested President Vladimir Putin who was considered a breath of fresh air after the Yeltsin years.
- China was growing very rapidly and thought likely to become more pacific and less authoritarian as its citizens became richer.
- North Korea was no threat to anyone – even to South Korea, with whom it was thought likely to reunite in due course.
Now, fast forward to 2015, and the picture has deteriorated notably…
- The U.S. administration and Congress are focused mostly on the Middle East, and will possibly intervene in a land war against ISIS.
- Russia has demonstrated its determination to intervene in Ukraine. Plus, Putin appears to think he can maintain his popularity at home by aggression abroad. Putin isn’t Adolf Hitler, whose aggressions came faster and faster. Yet even the more-cautious Putin could see the last months of the Obama administration as an opportunity to attempt a recovery of Latvia, Lithuania, or Estonia – all part of the Soviet Union until 1991 and now part of the EU and NATO. In that case, whether it wanted it or not, the NATO Western Alliance would have a full-scale war on its hands.
- Today, China also sees itself as a rising global superpower. It’s asserting itself against the apparently declining power of the United States – in the same way as the Kaiser’s Germany asserted itself against Britain, which, if we’re not careful, could lead to a 1914-like result.
- And then there’s North Korea, which has nuclear weapons… and Iran, which seems almost certain to get them. Neither country can be relied upon to keep the peace.
- Economically, we are also not in the tranquil world of 2000. The “Washington Consensus” of free trade and relatively free markets – by which the World Bank and International Monetary Fund were going to lead us all into prosperity – has broken down.
- Today, protectionist “anti-dumping” actions are common and getting more so, with a massive surplus of Chinese steel production capacity the next flashpoint.
- Above all, our monetary policies are much more extreme than in 2000. Interest rates have been below the inflation rate for nearly seven years. And we’ve seen trillions of dollars of Fed purchases in government bonds, which the Washington Consensus taught emerging markets was a no-no. That has inflated asset prices and stock markets to astounding levels.
- Oh, and the S&P 500 Index is about 40% above its 2000 level.
Bottom line: This market is not like that of 2000. The dangers today are much greater. And the cheap-money-fueled markets do not appear to be recognizing the threat.