The Cause and Effect of Cheap Money

The financial markets are currently doing a weird dance.

Because of the combination of trade wars, Brexit and the pandemic, capital has been flooding US markets for safekeeping. And what’s the universally accepted safe haven? United States (US) Treasury Bonds – example 20+ year US Treasury Bonds ETF (TLT).

Japan, China, the Saudis… these are just a few of the sovereign states that have been more than willing to gobble up Treasuries (US debt) over the years.

We are a debt funded nation. And the consequence of all this cash flooding into the US is that interest rates are forced down and debt becomes very inexpensive. But this cheap money also has to go somewhere, and it has raised valuation expectations to the stratosphere for securities like Tesla (TSLA).  

So what happens when everyone (and I mean global investors) start pulling out?

tlt treasury bonds etf crash decline lower investing analysis chart march year 2021
$TLT Longer Term US Treasury Bonds ETF

On one hand, the various crises are believed to be coming to an end. So that’s good news. We’ve come so far that now all that cheap money that came here for safety is starting to flow out of the US, threatening structures built on everyone’s willingness to park it here in the first place. It’s a bit of circular dilemma – China, let’s say, tries to sell Treasuries to invest back home, but the US Dollar surges, so the next day Treasuries are bought again.

And round and round we will go until the global engine really starts turning again.

It is hard to predict what will happen in the in-between, but it is not hard to look further out and know that we cannot stop capital from leaving the US when there’s no longer a crisis to keep it here.

Eventually, our trading partners will adjust to a falling dollar, and what will likely come to pass is that the sharp upward trajectory that the US equity markets have enjoyed (due to these various global shakedowns and resultant cheap money) will come to an end.

Twitter:  @rinehartmaria

The author may have positions in mentioned securities at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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