Investors: Lower Rates Might Not Mean What You Think

Chris Johnson

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.

Chris Johnson

About the Author

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Chris Johnson is a quant - he's obsessed with building and perfecting mathematical models that allow him to predict, with startling accuracy, the direction of the markets, entire sectors, and individual securities. For the last year, he's been researching and building a new system that lets him move swiftly in and out of the hottest stocks in the market for life-changing gains - entirely on his own terms. The results of his newly-minted Night Trader system are nothing short of amazing.

Chris also contributes to Money Morning as the Quant Analysis Specialist.

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