The Federal Reserve has painted itself into a corner, where there is no easy way out. The current global monetary system is headed for trouble. Dangers around rising inflation coupled with a weak employment environment, aka stagflation, are building. America already has the weak job market, and now as my previous post pointed out there are warning signs that the Fed’s latest policy moves are translating into inflationary forces. Having already focused on some of those signs, I am going to take a moment here to describe the dynamics of the problem. Although the leaders of the Fed not surprisingly argue there is nothing to worry about, there are three compelling reasons to believe otherwise.
History didn’t repeat in the 1987 stock market crash and the bear market that began in 2007, but it rhymed. Both market tops were propelled by the use of derivate security products that falsely promised to remove risk from investing, were characterized by unrealistically high valuations around an asset class and witnessed an important financial market freeze due to an ‘insurance run’. Although the general symptoms were the same however, the specifics were very different. And it is important to understand both the similarities and differences in order to spot future stock bear markets and assess the current market.