Holy flippity flip flap flop and smokes everyone. The federal reserve just dropped a bombshell and is literally crashing the markets right now, as i’m recording this, we are seeing the biggest sell-off we’ve seen in the s p, 500 and in the nasdaq for months. The nasdaq is down 2.5 percent and the s p 500 is down 1.3 percent.
So what is causing this selloff everyone and how bad will it get? That’S exactly what we’re going to go over in today’s video i’m going to reveal what the fed said. That is scaring the markets to death right now. So let’s not waste any time. Let’S get straight into the facts, the news and the data.
Okay, everyone first things. First, this is what’s happening. The federal reserve has put wheels in motion for its balance sheet reduction. Now don’t get this confused with what the federal reserve already announced? It was going to do of tapering its asset purchases.
What the federal reserve was previously doing was buying 120 billion dollars worth of u.s treasuries and mortgage-backed securities. Then, a couple months ago now that they’ve finally admitted that inflation is out of control. The economy is so called getting back to normal. They said they’re going to reduce these purchases, so the markets already knew this, and this isn’t what’s causing the sell-off.
But we just got the federal reserve minutes for the december meeting, and the members at the federal reserve are now saying this is what they’re going to do. The federal reserve at its december meeting began plans to start cutting back the amount of bonds it is holding with members saying the reduction in the balance sheet likely will start sometime after the central bank starts raising interest rates according to minutes released today. This is huge. Everyone, because, last time they did this this caused, what’s called a taper tantrum. This is where the markets get very upset because remember what are the markets addicted to right now, they’re addicted to stimulus and money printing?
So not only is the federal reserve going to completely stop the asset purchases in march, but also their eight trillion dollar balance sheet that absolutely skyrocketed since a pandemic and since the stock market crash of 2020, when it went from 4 trillion to nearly 9 trillion they’re Going to start dumping all those bonds and all those mortgage-backed securities at an alarming pace, almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target of the federal funds rate. The meeting summary stated so what this means is the markets are pricing, in that the first rate hike will be in march or april at the latest, and once they start hiking interest rates, also, at the same time now this is what’s really spooking the markets, because The markets didn’t expect them to do this. At the same time, they thought they would taper the asset purchases then lift interest rates, then start dumping bonds, but they’re doing it all at the same time and the markets weren’t ready for this and also what’s scaring the markets, like i said, is they’re going to Be doing this faster than last time. The minutes also indicated that, once a process begins, the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode in 2017.
Now i’ll bring up the chart of the federal reserve’s balance sheet, we can see here in 2017 they started reducing their balance sheet from around four and a half trillion all the way down to around 3
7 trillion – that was until september 19, when we had the repo market crisis and also in 2018, towards the end of that we saw the s.
P 500 plunge around 18, so the markets may have a bit of ptsd from what happened last time, but not only did they come out and confirm, there’s going to be at least at least three great hikes this year. There will also be another three, the following year and another two after that, so what this simply means is over the next two years, interest rates are going to go to at least two percent. Now this is going to have a huge effect on the stock market and housing market, because the stock market housing market have become addicted to zero percent interest rates and stimulus. And this is the only reasons why these high valuations have been justified. But like most real estate, experts know for every one percent increase in interest rates.
House prices can fall all the way up to ten percent, so they increased by two percent. We could see over the next two years. House prices fall at least 20 percent and you may say well look that’s over two years. Well, most people brought their home recently at all-time highs and they’re going to be in there for more than two years. So for all those people that formed into the housing market at all-time highs overpaid 10, 20 above market value, they could be facing negative equity over the next two years and we’ll also put the final nail in the coffin for more interest rate hikes.
Going is the last excuse, the federal reserve had was a jobs market they’ll continue to say, look, we know inflation is higher, but we want more people to get jobs, but we just got this new data. Today. Everyone, private jobs, growth, hit 807 000 in december. More than double expectations, so now that the jobs market is somewhat recovering, the federal reserve can’t use this as an excuse anymore, and there is also just simple fundamentals that valuations are just too high. Look at these indicators.
Everyone this, the warren buffett indicator, shows that the u.s stock market is 218 percent of gdp. That is significantly overvalued. Also, i’m starting to see again and again u.s equity giants, valuations, echo.
om exuberance, even legendary investor, berkshire hathaway munger, says now it is even crazier than the dot-com bust and i bring up a chart here. The largest us stocks are almost as expensive during the dot-com bubble and we can see the valuations. The price to earnings ratio is much higher than the financial crisis in 2008.
So everyone, this is the moment. We’Ve all been waiting for, and this is what i’ve been warning about all along now, unfortunately, for myself i thought the federal reserve would do this when we saw inflation wasn’t transitory six months ago.
That’S why i guess you could say i’ve been wrong and i was wrong on the timing and really nobody can predict the timing of the crash, but the writing was on the wall. I could see this coming also you my subscribers could see this coming and now it is happening when the federal reserve tapers interest rates go up. It is a simple economics. Asset prices have to come down to prices in and again like they said. It’S not only going to be three interest rate hikes this year, but three next year and then two again the following.
So over the next two years we could be entering into a bear market in the s p. 500.
Also, as i’m recording, this bitcoin has fallen below its support level of 45 000.. It is down now around 3.
down to around 44 600., but for all my gold bugs and precious metals investors. Gold is holding its value today. It is flat, but at least it is not dropping two and a half percent like the nasdaq, so everyone it looks like things are about to get real in the markets. What are your thoughts and what are your predictions for 2022?
Let me know now for all my loyal viewers and subscribers still watching you’re awesome thanks for watching i’ll put up to my other videos here, i’ll see you all there