We continue where we left off the last time. This time we’ll offer a forecast for the next few months.
The Bank of England was the first to react to the massive sell-off of the national bonds. It announced that it would keep buying them — in unlimited amounts. Does this remind you of anything? That’s right: the same QE purchases that the Fed launched in 2009.
Investors immediately stopped selling UK Treasurys — and speculators began buying them, trying to make a quick buck. And make a buck they did — without much risk. Bond yields dropped, and the debt market in the UK calmed down.
Why is this precedent important? Well, the Fed announced that it would keep fighting inflation, which is already around 9%. But in order to fight it efficiently, they would need to hike the interest rate to at least 9%, to equal inflation. That would lead to an enormous crash in the bond market, with numerous defaults on corporate bonds. In addition, homeowners would renounce their houses, as their market value would turn out to be lower than what the buyers owe in mortgage payments.
Do you believe that the Fed will keep its word and allow all this to happen? Investors don’t seem to believe this. Most likely, as interest rates increase, the GDP falls, and prices on most assets keep dropping, the Fed will have to go back on its restrictive monetary policy. As early as 2023, it will need to lower interest rates and perhaps even start a new round of QE.
Of course, this won’t help bring down inflation. But central banks are running out of options. As a result, most assets will keep losing their value in „real money“ equivalent.
Stocks don’t have much lower to go. But cryptocurrencies, especially Bitcoin, will become one of the few deflationary assets that can keep growing — especially since people will have less and less trust left in central banks.
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