Less than 6 months ago.
No one expected that by summer, the fed wouldn't just raise rates but would start to shrink
its balance sheet.
If you remember, J Powell, for almost 2 years, kept saying that we are not seeing any signs
of inflation getting out of hand even though the rates were at their minimum, but in the
last 6 months, the fed raised the rates 3 times.
First, back in February, by 0.25 percent, which, to be honest, didn't really do much
but sent a clear message to the market that the age of cheap money is over.
However, the market didn't really understand that, so in March, it raised the rates by
a higher percent, 50 basis points.
The market crashed, tech stocks plummeted, and crypto went to zero.
Some crypto-coins literally went bankrupt such as Luna, which seemed like a promising
project that is now worth nothing.
Even stable coins that are connected to the us dollar lost over half of their value.
How would a coin that's pegged to hard cash dollars plummet so much?
The answer is simple.
Investors are so doubtful of this technology that they are thinking of selling off and
getting out before everything collapses.
Little did everyone know that the worst was yet to come.
In June, J Powell, the chairman of the federal reserve, announced that the Fed is raising
the rates by another 75 points, which sent shock waves across the markets.
Not only it destroyed the entire stock market, but it also puts a huge question mark on the
future of the housing market since interest rates at 1.75 percent bring mortgage rates
to the point where the vast majority would not be able to afford, and those who will
be able to afford a home will see a significant reduction in their budget which will bring
down the demand which eventually brings down prices.
If you are wondering why I haven't mentioned crypto yet, that's because if a 0.5 percent
increase caused such a crash, what do you think a 0.75 percent increase would do to
crypt?
Since the 6th of June, when the market expects the fed to raise rates, bitcoin has already
dropped by 33 percent.
Coins such as Solana now cost a fraction of what they used to cost at their peak.
I wouldn't be surprised if Ethereum will cost less than a thousand dollars by the time this
video is out.
The problem is that this is not the end.
Because as I was writing the script for this video, J Powell said that next month, the
fed might be raising the rates by another 0.75 percent.
That will raise interest rates to 2.5 to 2.75 percent.
That would make them as high as they had been in march 2008 when the Fed tried to control
the housing market by raising interest rates.
But that raises a few questions?
Will that cause another recession?
How bad will the coming recession be?
and how will that impact the stock market?
We will answer all of these questions and many more, but before we do that, give this
video a thumbs up and let's get started.
Janet Yellen, the former chairman of the federal reserve and the current secretary of the treasury,
said in front of the congrees that Bringing Inflation Down Should Be a Top Priority.
Her testimony is a clear indicator that inflation is actually getting out of hand.
Inflation was so high that just a year ago, we had news such as this!
Where Raising wages isn't enough to attract and keep workers.
Higher wages lead to higher costs and will reflect in prices.
The Fed has been so reluctant to raise the rates because it knew that it wouldn't just
crash the markets but also raise unemployment.
We have already seen the news from giant companies that they would slash their workforce.
Coinbase will lay off 18 percent of its employees.
Tesla already began laying off 10 percent of its workforce, with ex-employees confirming
on LinkedIn that they've been laid off.
Elon Musk even suggested possible layoffs at Twitter, even though the deal is not over
yet.
Paypal began firing employees since May.
Tech companies have already realized that the age of cheap money is over, and it's time
to cut the cost and prepare for the storm, a storm that's going to swipe the markets.
High unemployment is a dangerous sign since it leads to lower aggregate demand.
A recession often occurs when there is a widespread drop in spending and a general decline in
economic activity.
When it lasts longer than a few months or two consecutive quarters and is visible in
real GDP, real income, and employment, it turns into a recession.
Soon we will find out how much unemployment has risen as a result of the Fed's actions.
If a recession lasts for at least 2 years or the GDP shrinks by 10 percent, then it
becomes a depression.
If it wasn't for Fed's loosening monetary policy, 2020 would have easily turned into
a depression.
The problem with easy monetary policy is that it solves the problem now at the expense of
the future, which means sooner or later, the taxpayers have to pay the price for avoiding
depression.
That was Fed's plan from the beginning.
But geopolitical challenges that the US is facing in 2022 are pushing the US to take
drastic actions now before everything collapses.
The consequences could be devastating if the US tries to solve the current problem by easing
monetary policy.
The world bank even warned that we might face a 1970 stagflation crisis.
Up until the 1970s, traditional economics suggested that inflation falls when unemployment
rises since people have less to spend, which drives prices down.
However, During the 1973 Arab-Israeli War, Arab countries imposed an oil embargo against
the United States in retaliation for the U.S. decision to re-supply the Israeli military.
The shortage of oil in the market pushed oil prices to cross 100 dollars per barrel, which
caused widespread inflation since that increased the cost of transportation.
The economy slowed and fell into a recession, but inflation kept rising.
The Fed's credibility as an inflation fighter was lost.
The end result was inflation so high it required two painful recessions to bring it down as
the Fed under Paul Volcker raised the federal funds rate to as much as 19%.
And that's a scenario that could be at the end of the tunnel that's waiting for us since
inflation isn't just driven by cheap money but also by high oil prices and shortages
in the market.
And that raises the question - how far should the Fed go to control inflation?
5%? 10%? Or how about 19%, as was the case in the 1970s.
If the fed even raises the rates t0 5 percent, that would already be a catastrophe.
The second question is - how long will the fed keep the rates high?
6 month?
12 months?
2 years?
Remember that an increase in interest rate will lead to high unemployment, which will
lead to a reduction in economic activity which means a recession and, if it's long enough,
then a depression.
That's why experts are worried that a recession isn't really the worst-case scenario, but
stagflation is.
And now, imagine for a moment, how will that impact the housing market?
How strongly will high unemployment and high mortgage rates hit the demand, and how much
will the prices fall?
Will they even fall when there is overall inflation in the first place?
Predicting the future isn't just difficult, but as they say, there are as many predictions
as the number of economists in the world.
But what they all agree on is the fact that it will be painful.
Any hike in interest rates will negatively impact the stock market because a dollar tomorrow
is worth less than a dollar today.
At the end of the day, any company is valued based on how much money it earns, but a rise
in interest rates lowers the value of future cash flow, which lowers the firm's value overall.
Investors often use a method called discounted cash flow to find out the real value of a
firm's future cash flow.
If you want us to make a video about that in the future, let me know in the comments
below.