The Fed cannot afford another 2008-style liquidity crisis.
And if you read between the lines of what the Fed says, it’s gearing up to do everything it can to make sure it doesn’t happen.
However, this is exactly what will lead us into the final phase of the 18.6-year real estate cycle.
Money to Become Abundant Again
You need liquidity in the system to create new credit, finance businesses and assets.
So I anticipate the Fed making sure there’s enough credit for everybody.
Just this week, it published two papers that paint a very bad picture.
It says because of the recent banking crisis, commercial banks have become more cautious.
In fact, commercial banks told the Fed that they might slow down their lending.
The three reasons given are a potential slowdown in the economy, low credit quality, and funding problems.
Well, as I’ve said many times in the past, we aren’t going to see a recession this year. Slower growth? Maybe. A full-on contraction? Unlikely.
For the second and the third reasons… there is an easy solution to expanding credit and introducing more funding resources into the system.
Lower interest rates (so borrowers have an easier time covering their interest payments) and more liquidity available to banks through several financial tools it has.
And here’s why the Fed is going to maintain liquidity in the financial system…
Profit from the “Curse”
We’re approaching the “winner’s curse” stage. That’s when credit is abundant, property prices are going up, and the general investing public gets complacent.
We’re headed exactly in this direction.
Some investors would think that the economic cycle is over… that we are headed into a recession and they should expect gloom and doom.
They are wrong. The banking crisis is the perfect setup for late-cycle euphoria.
The Fed has said: “A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”
If you read what’s between the lines in this statement… you’ll get what the Fed really means.
It means that it will do whatever it takes to make sure that there’s enough credit available for businesses and households.
Because it must. Otherwise, it will lose all credibility as an institution that couldn’t prevent another 2008-like collapse.
And when the Fed starts flooding the system with liquidity, the final stage of the cycle will officially begin.
Granted, this may be hard to see presently. But it’s what happened at the 11th hour of all prior real estate cycles, right back to 1800.
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson
P.S. We’ve entered a period of the real estate cycle in which the greatest gains can be made… if you’re prepared for the market’s moves.
I recently launched a brand-new newsletter to give you specific plays that do well in each part of the cycle, so you can build (or rebuild) your wealth.
Check it out right here.
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