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I was online with some of my team members last Wednesday while the Fed was announcing a 25-basis-point cut to the Fed funds target rate.
As usual, the conversation was lighthearted, but I got thought-provoking questions: What did I think about the fact that central banks all around the world were pumping stimulus into their economies at essentially the same time? Are we getting set up for a global smackdown as some of the market preppers are suggesting?
A story came right to mind. With this much cheap money flooding global markets again, some things are going to change…
Cheap Money Becomes Expensive Debt
Around 44 million Americans owe about $1.5 trillion in outstanding student debt. They're really racking it up. Students (and in many cases, parents and even grandparents) are hamstrung for decades after their graduation.
This causes a kind of butterfly effect that's going to ripple through generations.
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I remember the days as a young freshman when we would walk through the Oval at Ohio State. We'd be greeted by goodie bags of free t-shirts, Frisbees, and other tchotchkes that would (mostly) wind up in the garbage. Just about everything in those goodie bags was tied to a credit card application for a "great introductory rate" that was "perfect for young college students."
You know the kind I mean – you stay ahead of the payments for the first six months, then maybe you start to accumulate a balance and pay the monthly minimum to try and get it back under control. Of course, two years later, most students are carrying a balance in the thousands with a rate that continues to creep higher. Paying the minimum guarantees that debt sticks with you for, well, generations.
The point is cheap money costs plenty over the long run, and it feels like central banks from New York to Tokyo are taking that walk through the Oval picking up a bunch of credit tchotchkes.
The irony is that we have legislators and presidential candidates that are trying to put together plans to forgive college debts because it's become almost impossible to get out from under the burden! This is at the same time that the Fed and other big central banks are helping to facilitate the same situation at a macro level.
So what's this have to do with the markets?
A lot… Cheap money can buy short- and intermediate-term market gains at the expense of long-term economic health.
Here's what I think is happening.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Straight-Up Profits. He also contributes to Money Morning as the Quant Analysis Specialist.