History tells us that we are in for a strong bull market with a sharp fall

History tells us that we are in for a strong bull market with a sharp fall

While the US Federal Reserve decided to hold interest rates at its November meeting, they remain at their highest levels since long before the global financial crisis of 2008-2009. The federal funds rate ranges between 5.25% and 5.5%, which is similar to the rate in the United Kingdom (5.25%), while the interest rate in the European Union reached a record level of 4%.

This is due to high rates of inflation, which remain chronic throughout the developed Western world. It’s so sticky that some, including Citadel’s Ken Griffin, expect it to stick around for a decade or more. As such, central banks are now considering higher interest rates that may last longer.

This represents a significant departure from what has become the norm over the past 15 years: ultra-low interest rates facilitated by never-ending cycles of borrowing at the levels of government, businesses and individuals. This steady flow of money led to a strong, uniform rally in the wake of the global financial crisis, and kept stock markets on life support during the worst global health crisis in more than 100 years.

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It is understandable, then, that investors are concerned about what the end of this system might look like, and rightly so. If history has taught us anything, it is that capitalism is a game of boom and bust. Now, we are at the beginning of a new cycle.

While most of us look straight back to 2008 to understand our current situation, it’s helpful to look back a little. Between 1993 and 1995, US interest rates rose rapidly after the flash crash of 1989, high inflation rates, and tensions in the Middle East, putting pressure on the world’s largest economy. In response, the Federal Reserve raised interest rates from 3% in 1993 to 6% by 1995.

But far from harming the United States or its Western trading partners, this rise marked the beginning of an amazing period of growth. Between 1995 and 1999, the S&P 500 more than tripled in value, while the Nasdaq Composite rose a staggering 800%.

This was a period of globalization, innovation, and optimism that led to the creation of what became the backbone not only of the global economy, but of the lives of every human being on the planet: the Internet. But this did not last, and by October 2002, the dot-com bubble had burst and the Nasdaq had given up all of its gains.

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Today we also find ourselves emerging from a harsh period of high inflation and high interest rates, against the backdrop of rising tensions in Europe and the Middle East. Likewise, though, the economy is performing remarkably well, despite everything it has faced since the Covid-19 pandemic.

We can also draw parallels between the dot-com boom and cryptocurrencies. January will almost certainly see one or more US Bitcoin ETF approvals, pushing huge waves of institutional money into the relatively new asset class. This is likely to spur a flurry of IPO activity within and outside the industry, which could eventually explode, as it did in 1999.

Although we can make some comparisons with the 1990s, there is one major factor that brings us closer to the 2001-2007 market cycle: debt. As we all know – thanks to Margot Robbie explaining it to us in the bubble bath – 2001-2007 was one of the most reckless periods of lending, and hence trading, ever. The result was to change the world.

Today we see frightening signs of what happened in 2008, with US household debt rising to unprecedented levels and delinquency rates on credit card loans rising at the fastest rate since 1991. Instead of tightening their belts, American consumers have opted for so-called “revenge spending.” After being confined to their homes for nearly two years, this is taking its toll.

Reversing this credit trend may not lead to the collapse of the global banking system as happened in 2008; But it is important for the health of the US economy, which is currently driven by the American consumer. The longer interest rates remain high, the greater the pressure as those debts pile up.

Of course, to address the 10-ton elephant in the room, it’s not just the American consumer who’s racking up debt. Thanks to the pandemic, the US government has now lost more than $30 trillion. This is a previously unimaginable situation that has led to a downgrade in the credit rating of the world’s largest economy, a situation that everyone has so far ignored as no big deal.

But we have not yet reached the inflection point of the “credit crunch” of 2008. Although activity in the bond market suggests otherwise, the US economy remains resilient – ​​and the US consumer in particular. High interest rates haven’t stopped people from buying property, and no one seems interested in cutting back on spending because wages are still rising faster than inflation.

The difference between the inflation rate and wage growth in the United States from January 2020 to September 2023. Source: Statista

We’re also seeing some optimism in the markets, especially the cryptocurrency market, which has already begun its next bull cycle as investors exorcise the ghosts of Terraform Labs, Three Arrows Capital, Celsius, and FTX by staking altcoins.

Therefore, the odds are very strong in favor of a bull market over the next year or two until it runs out of steam, as it always does. Eventually, the massive debt pile owed by US consumers will collapse, especially if interest rates stay higher for longer.

The two most important players in this session will be the US Treasury and the Federal Reserve. As we saw in March 2023, they are willing to rewrite the rules to ensure the survival of the banking system. As things shake up, the goalposts are likely to be moved. However, what goes up must come down. Of that we can be sure.

Lucas Kelly He is the chief investment officer at Yield App, where he oversees portfolio allocations and leads the expansion of its diverse portfolio of investment products. He was previously Chief Investment Officer at Diginex Asset Management, and Senior Trader and Managing Director at Credit Suisse in Hong Kong, where he ran QIS and structured derivatives trading. He was also head of exotic derivatives at UBS in Australia.

This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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