The Looming Crisis: Who Is Swimming Naked?

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

I recently wrote The Lag Effect Will Trigger a Recession to illustrate why it takes time for higher interest rates to inflict economic damage. I follow that up with a discussion of something equally worrying that also lags Fed rate hikes. A financial crisis will likely follow the Fed’s “higher for longer” interest rate campaign.

I am not clairvoyant in predicting a crisis; I am just a student of financial history.

As shown below, a crisis occurs every time Fed funds have risen abruptly. Looking closely, you will see that most of the situations followed rate hikes and were quickly addressed by the Fed with sharp reversals in the Fed funds rate.

fed funds

This article will explain why a financial crisis, following the 5.50% hike in Fed funds and similar increases in all bond yields, is virtually inevitable.

Leverage and high interest rates don’t mix

Warren Buffett has often said:

A rising tide floats all boats…. Only when the tide goes out do you discover who’s been swimming naked.