June 28, 2018, on NPR, an economic review covered this topic in depth: Why are stock prices dropping?
Because of a trade war? No, no, no. If a trade war were the cause, then only the stocks affected by imports would be dropping. But since the whole market is dropping, the cause is something more universal. And, since American steel manufacturers are increasing output and capacity, the economic law of competitive substitution is at work as predicted by the Trump team. The same is true for solar panels and washing machines, on which Trump increased tariffs more than a year ago. Over the last year, more U.S. manufacturers moved to fill the demand for solar panels and washing machines – competitive substitution. That is good for American companies, but not good for globalists.
All of the last three recessions were preceded by the Federal Reserve increasing short-term interest rates too much – in 1991, 2000 and 2007. All harmed Republican presidents. And how much is too much? When short-term rates produce higher yields than do long-term rates, we know the Fed increased short-term rates too much. The spread between short-term rates and long-term rates is usually from 1.5 to 2.5 points. As of Thursday, the short-term rates increased without the long-term rates following them, so the short-term rates are now 2.5 percent on average from banking institutions while long term rates are 2.8 percent. That's only a 0.3 percent spread.
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The professional investors are worried. When that spread is placed into the investment formulas of professional investors, it causes concern. Will the Fed increase interest rates more? Will the long-term rates continue not to respond so that short-term rates are greater than long-term rates? Will the yield curve become inverted? When the yield curve becomes inverted, a recession follows it by nine to 18 months.
The actions of the Fed:
1. Cause P to E (price to earnings) ratios to change. As interest rates increase, P to E ratios decrease, which drives down stock prices, but as interest rates decrease, as when Obama was president, P to E ratios increase, which drives up stock prices.
2. Cause more or less money to be available for consumers and investment. Since short-term rates are increasing while long-term rates are not, credit card interest rates and other short-term rates are increasing faster than what is needed for long-term capital returns, which drives down the available money supply for consumers – and 70 percent of the U.S. economy is driven by consumption, not trade.
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Is the Fed doing this deliberately? The Fed is made up of smart guys and gals. It must understand the yield curve and what happens when that curve becomes inverted. As part of the world investment community, along with the EU Central Bank and the World Bank, the Fed is made up of globalists … the enemies of nationalists like Trump. The only way globalists can stop Trump is by sending the economy into recession, by increasing interest rates to cool it off.
Globalists keep pointing to tariffs and a trade war as a diversion from what is happening with interest rates. During Obama, the Fed dropped interest rates to near zero, printed a trillion dollars a year and purchased $3 trillion of bonds – all to put more money into the money supply for consumption and to drive up stock prices. Stock prices increased more than 200 percent while GDP only increased a total of 14 percent during the entire eight years of Obama. The Fed drove up stock prices. The Fed is doing the exact opposite now.
The prediction is that GDP will increase more than 5 percent for the second quarter of 2018. Wow! Go Trump! Because of tax cuts, repatriation of $3 trillion, elimination of Obama regulations, rules and executive orders, and tariffs, which cause competitive substitution of American-made products, the U.S. GDP is increasing faster than inflation for the first time since George W. Bush. That is great for American wages and American companies. So why would the Fed want to cool that off except to stop Trump and nationalists? With GDP increasing faster than inflation and average corporate profits increasing between 18 and 27 percent, increasing interest rates are the only viable reason as to why stock prices are decreasing – it's not because of tariffs.
Fear the Fed. Fear the globalists.