How rising interest rates will trigger the next financial crisis

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Wednesday, the US Federal Reserve raised its key rate by one percentage point to 2% – 2.25%, the highest level since April 2008. As rates continue to climb to their lowest record recession levels, market participants and commentators show almost no sign of fear the market hits records again and complacency is great. Unfortunately, "soft landings" after rate hike cycles are as rare as unicorns and almost every modern rate hike has led to a recessionary crisis, financial or banking. There is no reason to believe that this time will be different.

As I explained in the past, periods of low interest rates help create credit and asset booms as follows:

• By encouraging more borrowings from consumers, businesses and governments
• By discouraging cash holdings over expenses and speculating on riskier assets and efforts
• Investors can borrow cheaply to speculate on assets (eg, low-cost mortgages for real estate speculation and low-margin costs for commercial stocks)
• By making it cheaper to borrow to make stock buybacks, dividend increases and mergers and acquisitions
• By encouraging higher inflation rates, which helps support assets such as stocks and real estate

When central banks set interest rates and keep them low to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and the financial markets. which has distortions and imbalances. By keeping interest rates at artificially low levels, the Fed creates "false signals"that encourage businesses and other businesses that would not be profitable or viable in a normal interest rate environment.

Businesses or other investments made as a result of artificial credit terms are known as "bad investments" and usually fail when interest rates return to normal levels. In the late 1990s, the technology bubble, real estate developments in the mid-2000s, and the construction of unfinished skyscrapers in Dubai and other emerging markets after the global financial crisis are examples.

While it is difficult to accurately determine which investments or which companies are divestments in a distorted economy by a central bank, a quote from Warren Buffett is extremely applicable: "only when the tide comes out, find out who has been swim naked. "For the purposes of this discussion," the trend is downward "refers to the rise in interest rates.

The table below shows how Recessions or financial crises have occurred after historic cycles of rising interest rates:

Here is a list of historical recessions, banking and financial crises that occurred after cycles of rising interest rates (this list corresponds to the chart above):

Rate increase cycle in the late 1970s and early 1980s:

• 1980 recession: A 6-month recession that's concentrated in housing, the manufacturing industry and the auto industry.
• 1981 – 1982 recession: A 16-month recession in which 2.9 million jobs were lost.
• Crisis of Savings and Loans in the United States: 1,043 out of 3,234 savings and loan associations failed in interest rate at which they could borrow exceeded the fixed interest rates of the loans they had In addition, savings and credit institutions were limited by interest rate ceilings, which led them to lose deposits in higher-paying commercial bank accounts.
• United States: housing market collapse: Mortgage rates climbed to 18%, which lowered housing affordability. Therefore, Sales of existing homes declined by 50% between 1978 and 1981, affecting the entire industry, including mortgage lenders, real estate agents, construction workers, and others.
• Crisis of the automobile industry: Similar to the situation in housing, Higher interest rates have made auto financing much more expensive. As a result, auto sales have fallen, resulting in a reduction of 310,000 jobs (or a third) in the industry.
• Debt crisis in Latin America: Rising interest rates have made it more difficult to repay the debts of heavily indebted Latin American countries.

Rate increase cycle in the mid-1980s:

• Continental bank failure: In 1984, Continental Illinois became the largest bankruptcy bank in the history of the United States (up to the failure of Washington Mutual in 2008). Rising interest rates and ba d Loans to oil and gas producers in Texas and Oklahoma contributed significantly to the bank's demise.

Round of rate hikes in the late 1980s:

• Recession of the early 1990s: An 8-month recession in which 1,623 million jobs were lost.
• Crisis of Savings and Loans in the United States: Rising interest rates and the slowdown in real estate in the United States led to the continuation of the savings and loan crisis that began in the early 1980s.
• United States: real estate recession: Rising interest rates led to a slowdown in commercial and residential real estate.

Rate increase cycle in the mid-1990s:

• Emerging Market Crisis / Mexican Peso Crisis: In the early 1990s, low US interest rates made higher-yielding emerging market assets more attractive to investors. As US interest rates rose, Mexico and other emerging economies experienced painful adjustments and currency devaluations.
• Bankruptcy of Orange County California: Bad bets on high leverage interest rate derivatives caused the bankruptcy of the country as interest rates rose.

Rate increase cycle in the early 2000s:

• Recession of the early 2000s: An 8-month recession in which 1.59 million jobs were lost after the burst of the tech bubble.
• Technical bubble bust: Rising interest rates contributed to the bursting of the technology bubble of the late 1990s centered on Internet-related companies, telecommunication companies, the telecommunications industry, and so on.

Rate increase cycle in the mid-2000s:

• Great recession: An 18-month recession during which 8.8 million jobs were lost after the bursting of the US housing and credit bubble.
• Tightening credit and the housing crisis in the United States: Low interest rates after the onset of the technological crisis in the early 2000s led to the formation of a bubble in housing and credit. When interest rates rose again in the mid-2000s, housing prices and mortgage-backed securities plunged.

The current rate hike cycle will not end differently

All the modern cycles of rising interest rates that we have looked at have led to recessions or a financial crisis, and the current one will not be different. This time, it will be the "Any Bubble" that bursts. "Everything Bubble" is a term I coined to describe a dangerous bubble that has developed in a wide variety of countries, industries and assets – please visit my website for more information. the rates, the US and the global economy are saturated with bubbles and other distortions that will only be revealed by rising interest rates: because of our record debt, interest rates should not increase financial crisis this time.

Here are some examples of interest-sensitive sectors that I believe have bubbles that will burst as interest rates rise:

• Emerging Markets: Extremely low interest rates and quantitative easing measures in the US and Europe after the Great Recession led to billions of dollars in hot money in emerging economies, leading to the development of credit bubbles and assets. Emerging market debt has almost tripled $ 60 trillion in the last decade. Turkey, South Africa and many other emerging markets are going under the sign of rates of interest. US interest and the rising dollar.
• American debt bubble: The low interest rate environment after the Great Recession encouraged public companies to borrow heavily in the bond market. The total outstanding amount of non-financial corporate debt has increased by more than $ 2.5 trillion, or 40%, since its peak of 2008. US corporate debt has reached a record high of over 45% GDP (see chart below), which is even worse than the levels reached during the dot-com bubble and the US housing and credit bubble. Read my warning about corporate debt Forbes to learn more.

• United States: energy boom / energy bonds: This boom / bubble is closely related to the corporate debt bubble discussed above. The oil and gas extraction of shale by fracturing is extremely capital intensive and would not be feasible in a normal interest rate environment. Thanks to the artificially low interest rate environment since the Great Recession, shale energy The industry's net debt reached $ 200 billion in 2015, an increase of 300% over 2005. The rise in interest rates and the bursting of the corporate bond and bond bubble are cause a collapse of the sector.
• American auto loans: Low interest rates after the Great Recession lowered the cost of financing and leasing automobiles, which led to a boom in auto sales. Total auto loans outstanding increased 36% to $ 1.111 billion over the past decade. Rising interest rates will result in higher monthly payments, which will lead to lower sales and a collapse in the auto industry.
• American commercial real estate: Commercial real estate is a very sensitive area of ​​interest rates, which peaked due to low interest rates after the Great Recession. According to Green Street Advisors, prices for commercial real estate in the United States have more than doubled since 2009.
• US residential real estate: As I have recently explained in Forbes, US housing prices are now exceeding their peak in the housing bubble and are up 50% from their 2012 low thanks to extremely low mortgage rates. Mortgage rates have not reached such low levels, but thanks to the intervention of the Fed in the form of quantitative easing. The Fed is currently reversing its quantitative easing program of $ 40 billion a month and, unsurprisingly, mortgage rates have reached their highest level in seven years and the real estate market is slowing.

US investors are dangerously exposed to explosions in interest-sensitive sectors, which will impact the heavily inflated stock market. Please read my report on the US stock market bubble in Forbes for more information. The S & P 500 has risen more than 300% since March 2009 due to the Federal Reserve's manipulation of the market:

Many valuation measures show that the US stock market is more overvalued than it was at the major peaks of the generational markets, which means that another bear market is inevitable. according to the market capitalization / GDP ratio of the United States (also called Warren Buffett's "favorite indicator"), the market is more overvalued than it was even during the dot-com bubble:

The current cycle of rising interest rates will not end differently from the other topics discussed in this section – if any, it will likely happen even worse because interest rates have been kept at records for a record period. The recession, the crisis and the coming bear market will be in proportion to the unprecedented imbalances and distortions that have accumulated in our economy.

At Clarity Financial LLC, a registered investment advisory firm, we specialize in preserving and growing investor wealth in these risky times. If you are concerned about your financial future, please Click here to contact me.

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Wednesday, the US Federal Reserve raised its key rate by one percentage point to 2% – 2.25%, the highest level since April 2008. As rates continue to climb to their lowest record recession levels, market participants and commentators show almost no sign of fear the market hits records again and complacency is great. Unfortunately, "soft landings" after rate hike cycles are as rare as unicorns and almost every modern rate hike has led to a recessionary crisis, financial or banking. There is no reason to believe that this time will be different.

As I explained in the past, periods of low interest rates help create credit and asset booms as follows:

• By encouraging more borrowings from consumers, businesses and governments
• By discouraging cash holdings over expenses and speculating on riskier assets and efforts
• Investors can borrow cheaply to speculate on assets (eg, low-cost mortgages for real estate speculation and low-margin costs for commercial stocks)
• By making it cheaper to borrow to make stock buybacks, dividend increases and mergers and acquisitions
• By encouraging higher inflation rates, which helps support assets such as stocks and real estate

When central banks set interest rates and keep them low to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and the financial markets. which has distortions and imbalances. By keeping interest rates at artificially low levels, the Fed creates "false signals"that encourage businesses and other businesses that would not be profitable or viable in a normal interest rate environment.

Businesses or other investments made as a result of artificial credit terms are known as "bad investments" and usually fail when interest rates return to normal levels. In the late 1990s, the technology bubble, real estate developments in the mid-2000s, and the construction of unfinished skyscrapers in Dubai and other emerging markets after the global financial crisis are examples.

While it is difficult to accurately determine which investments or which companies are divestments in a distorted economy by a central bank, a quote from Warren Buffett is extremely applicable: "only when the tide comes out, find out who has been swim naked. "For the purposes of this discussion," the trend is downward "refers to the rise in interest rates.

The table below shows how Recessions or financial crises have occurred after historic cycles of rising interest rates:

Here is a list of historical recessions, banking and financial crises that occurred after cycles of rising interest rates (this list corresponds to the chart above):

Rate increase cycle in the late 1970s and early 1980s:

• 1980 recession: A 6-month recession that's concentrated in housing, the manufacturing industry and the auto industry.
• 1981 – 1982 recession: A 16-month recession in which 2.9 million jobs were lost.
• Crisis of Savings and Loans in the United States: 1,043 out of 3,234 savings and loan associations failed in interest rate at which they could borrow exceeded the fixed interest rates of the loans they had In addition, savings and credit institutions were limited by interest rate ceilings, which led them to lose deposits in higher-paying commercial bank accounts.
• United States: housing market collapse: Mortgage rates climbed to 18%, which lowered housing affordability. Therefore, Sales of existing homes declined by 50% between 1978 and 1981, affecting the entire industry, including mortgage lenders, real estate agents, construction workers, and others.
• Crisis of the automobile industry: Similar to the situation in housing, Higher interest rates have made auto financing much more expensive. As a result, auto sales have fallen, resulting in a reduction of 310,000 jobs (or a third) in the industry.
• Debt crisis in Latin America: Rising interest rates have made it more difficult to repay the debts of heavily indebted Latin American countries.

Rate increase cycle in the mid-1980s:

• Continental bank failure: In 1984, Continental Illinois became the largest bankruptcy bank in the history of the United States (up to the failure of Washington Mutual in 2008). Rising interest rates and ba d Loans to oil and gas producers in Texas and Oklahoma contributed significantly to the bank's demise.

Round of rate hikes in the late 1980s:

• Recession of the early 1990s: An 8-month recession in which 1,623 million jobs were lost.
• Crisis of Savings and Loans in the United States: Rising interest rates and the slowdown in real estate in the United States led to the continuation of the savings and loan crisis that began in the early 1980s.
• United States: real estate recession: Rising interest rates led to a slowdown in commercial and residential real estate.

Rate increase cycle in the mid-1990s:

• Emerging Market Crisis / Mexican Peso Crisis: In the early 1990s, low US interest rates made higher-yielding emerging market assets more attractive to investors. As US interest rates rose, Mexico and other emerging economies experienced painful adjustments and currency devaluations.
• Bankruptcy of Orange County California: Bad bets on high leverage interest rate derivatives caused the bankruptcy of the country as interest rates rose.

Rate increase cycle in the early 2000s:

• Recession of the early 2000s: An 8-month recession in which 1.59 million jobs were lost after the burst of the tech bubble.
• Technical bubble bust: Rising interest rates contributed to the bursting of the technology bubble of the late 1990s centered on Internet-related companies, telecommunication companies, the telecommunications industry, and so on.

Rate increase cycle in the mid-2000s:

• Great recession: An 18-month recession during which 8.8 million jobs were lost after the bursting of the US housing and credit bubble.
• Tightening credit and the housing crisis in the United States: Low interest rates after the onset of the technological crisis in the early 2000s led to the formation of a bubble in housing and credit. When interest rates rose again in the mid-2000s, housing prices and mortgage-backed securities plunged.

The current rate hike cycle will not end differently

All the modern cycles of rising interest rates that we have looked at have led to recessions or a financial crisis, and the current one will not be different. This time, it will be the "Any Bubble" that bursts. "Everything Bubble" is a term I coined to describe a dangerous bubble that has developed in a wide variety of countries, industries and assets – please visit my website for more information. the rates, the US and the global economy are saturated with bubbles and other distortions that will only be revealed by rising interest rates: because of our record debt, interest rates should not increase financial crisis this time.

Here are some examples of interest rate sensitive sectors that I believe have bubbles that will burst as interest rates rise:

• Emerging Markets: Extremely low interest rates and quantitative easing measures in the US and Europe after the Great Recession led to billions of dollars in hot money in emerging economies, leading to the development of credit bubbles and assets. Emerging market debt has almost tripled $ 60 trillion in the last decade. Turkey, South Africa and many other emerging markets are going under the sign of rates of interest. US interest and the rising dollar.
• American debt bubble: The low interest rate environment after the Great Recession encouraged public companies to borrow heavily in the bond market. The total outstanding amount of non-financial corporate debt has increased by more than $ 2.5 trillion, or 40%, since its peak of 2008. US corporate debt has reached a record high of over 45% GDP (see chart below), which is even worse than the levels reached during the dot-com bubble and the US housing and credit bubble. Read my warning about corporate debt Forbes to learn more.

• United States: energy boom / energy bonds: This boom / bubble is closely related to the corporate debt bubble discussed above. The oil and gas extraction of shale by fracturing is extremely capital intensive and would not be feasible in a normal interest rate environment. Thanks to the artificially low interest rate environment since the Great Recession, shale energy The industry's net debt reached $ 200 billion in 2015, an increase of 300% over 2005. The rise in interest rates and the bursting of the corporate bond and bond bubble are cause a collapse of the sector.
• American auto loans: Low interest rates after the Great Recession lowered the cost of financing and leasing automobiles, which led to a boom in auto sales. Total auto loans outstanding increased 36% to $ 1.111 billion over the past decade. Rising interest rates will result in higher monthly payments, which will lead to lower sales and a collapse in the auto industry.
• American commercial real estate: Commercial real estate is a very sensitive area of ​​interest rates, which peaked due to low interest rates after the Great Recession. According to Green Street Advisors, prices for commercial real estate in the United States have more than doubled since 2009.
• US residential real estate: As I have recently explained in Forbes, US housing prices are now exceeding their peak in the housing bubble and are up 50% from their 2012 low thanks to extremely low mortgage rates. Mortgage rates have not reached such low levels, but thanks to the intervention of the Fed in the form of quantitative easing. The Fed is currently reversing its quantitative easing program of $ 40 billion a month and, unsurprisingly, mortgage rates have reached their highest level in seven years and the real estate market is slowing.

US investors are dangerously exposed to explosions in interest-sensitive sectors, which will impact the heavily inflated stock market. Please read my report on the US stock market bubble in Forbes for more information. The S & P 500 has risen more than 300% since March 2009 due to the Federal Reserve's manipulation of the market:

Many valuation measures show that the US stock market is more overvalued than it was at the major peaks of the generational markets, which means that another bear market is inevitable. according to the market capitalization / GDP ratio of the United States (also called Warren Buffett's "favorite indicator"), the market is more overvalued than it was even during the dot-com bubble:

The current cycle of rising interest rates will not end differently from the other topics discussed in this section – if any, it will likely happen even worse because interest rates have been kept at records for a record period. The recession, the crisis and the coming bear market will be in proportion to the unprecedented imbalances and distortions that have accumulated in our economy.

At Clarity Financial LLC, a registered investment advisory firm, we specialize in preserving and growing investor wealth in these risky times. If you are concerned about your financial future, please Click here to contact me.