Financial System: From Speculative Frenzy to the “Death Zone”

As central banks signal further interest rate increases, the system signals that a boundary condition is being reached in both the stock and bond markets. In an analyst’s note, Morgan Stanley chief U.S. equity strategist, Mike Wilson, likened the current stock market increase to the “death zone” that mountain climbers experience when they reach an altitude so high they don’t have enough oxygen to breathe. “Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents,” Wilson wrote. “This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they’ve been many times over the past decade.”

Such a “speculative frenzy” was based on the expectation that the Federal Reserve would be forced to stop their QT policy and lower interest rates – which is not happening. Justified by January inflation figures higher than expected, with the CPI increasing by 5.4% year-on-year, the Fed will continue to increase the rates, in an attempt to lower inflation. In that case, Wilson predicts that the S&P 500 will drop to 3,000 points within months, down about 26% from current levels.

At the European Central Bank, both Christine Lagarde and member of the board Isabel Schnabel said their bank would do the same: “In view of the underlying inflation pressures we intend to raise interest rates by another 50 basis points at our next meeting in March, and we will then evaluate the subsequent path of our monetary policy,” Lagarde told a European Parliament committee on Feb. 15.

The impact of soaring interest rates is far worse in the developing sector, and is leading to a blowout. That is evident in Latin America. In Argentina, the central bank’s basic rate has risen from 35% one year ago, to 75% today. The actual cost of borrowing for a small or medium business, however, is over 300%, according to reliable sources consulted by EIR.

In neighboring Brazil, the rising Fed interest rate has pushed that country’s central bank rate up from 10.7% a year ago, to 13.75% today. In the same period, Mexico’s rate jumped from 6% to 11.25%. Inflation is soaring in all these countries.

Thus, to try and fight a monster they themselves created, namely inflation, central banks are creating multiple, larger monsters. The system cannot be rescued from inside and must be replaced by a new one.

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