All time highs in the S&P 500 fueled by a Federal Reserve pledging to sustain US economic expansion by interest rate cuts. Historically low interest rates and QE have caused the global economy to become addicted to cheap debt. 0% interest and negative rates were intended as a short term monetary policy to pull the world economy from the brink of collapse.

Low interest rates have become the new normal and central banks have lost the chance to normalize monetary policy as a result of the longest economic expansion in US history (2009 to current). 12 trillion in world debt is yielding negative and investors are paying their governments interest to hold debt securities. German 3 year bunds are yielding -0.75% and there are 14 companies in Europe with a junk credit rating and a negative yield. I REPEAT, European investors are PAYING their governments to own bonds and are willing to own JUNK rated bonds at negative yield.

Now why would someone buy negative yield debt? Because you are buying on the “hope” to sell it for a higher market value to some other schmuck. Just think, Austrian 100 year bond market values are up 20% this year with a yield to maturity of 1.2%. All that is wrong with the market is explained by 0% interest rates.

The S&P 500 Index broke 3000 this week and set an all time high. The markets rallied on Jerome Powell’s comments stating the Federal Reserve would do what’s necessary to maintain growth in the US economy. The market liked this dovish tone and priced in a 100% chance of a Federal Reserve interest rate cut by the end of July. Earnings growth isn’t driving the record rally and the stock market is achieving all time highs based on valuation expansion, or in other words, investors are willing to pay more for stocks.

Rate cuts can’t fuel a perpetual growth cycle and at some point inflation or another economic factor will react as it would under non QE conditions and cause a downturn in the US and world economy. This isn’t a time to be all in US or world equities because there is more downside risk than upside return potential. A balanced portfolio of short duration fixed income and an ample cash position will be rewarded over the next 12 months or so.

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