[Authors Note: This material is for entertainment and educational purposes only. Consult an investment professional about your personal investment needs and preferences for risk]

I HAVE BEEN AN AVID OBSERVER  for thirty years as markets have made their seemingly inexorable rise despite manias and crashes and soaring national debt. I read about historical markets and the concomitant calamities and mostly booming recoveries therefrom.  I wish I had a dollar for every conspiracy theory and every method of prediction or forecasting I have come across. I even had a financial radio show in 2005-6. All of my guests–many of them prestigious–predicted the crash to come, though two years early.  The current market condition–like much of what else has happened in the last five years–continues to have a surreal quality about it: Rules? –What rules?  Norms and standards and facts? –Make up your own!

Despite my own negative forecasts, markets continue to rise at unsustainable rates to unsustainable levels–which markets can and will do– but when the US Federal Reserve can create money to inject into the financial system IN ANY AMOUNT DESIRED, it’s foolish to think the market can fall. Besides, if 85% of stock market wealth is held by the wealthiest 10% (who own 70% of total US wealth), why would that very powerful elite stand back and let them fall?

See below the stock market (S&P500 Index) since the late 1980s:

Since 2009, the Fed has purchased nearly seven trillion dollars worth of securities–mostly bonds.  Half of these were bought in the last year, but the Fed continues to purchase $120 billion in “bonds” per month (they are different things, but bond-like things)!  Of course, they dropped interest rates to near-zero last year, too.  So maybe it is folly to think the market can fall…or is it?

Considering that a global pandemic only kept the US market down for a few months last year–despite the fact that the 2020 US president was probably the worst pandemic manager in the developed world–the two charts below might hint at what could possibly stop this Godzilla market. As I pointed out above, the Fed has been uber-aggressive in flooding the financial system with cheap money during every past crash/recession. If you didn’t know better (is ignorance bliss?) you would think the markets will never, ever, be allowed to fall and stay down for any length of time.

But the what if the Fed could not lower interest rates and make these huge bond purchases? What would prevent them? Would that stop the Godzilla market (I haven’t seen the new movie so don’t answer that)? If it takes a thief to catch a thief and it takes a superhero to stop a super-villain, then maybe it takes a super-creature to kill a super-creature.

Enter King Kong, the hyper-inflated Ape.

If there is a nemesis to the stock market, it’s the bond market. In other words, inflation. Interest rates have been falling for thirty years because for most consumer goods, inflation has been falling. Interest rates and inflation are part of the same thing.  Rising inflation means higher interest rates–a potential monster-market-killer.

See below the interest rate on the 10-year treasury since 1990.

By now, any astute reader knows that the two charts displayed here probably represent things with an inverse relationship. In other words, while one went up, the other went down (disclaimer: correlation does not equal causation).  The Ten-Year US Treasury yield was at 12.5% in 1985 and it recently hit one half of one percent. The stock market is up by about the same magnitude as interest rates are down during the same period (i.e ten or twelve times).

Inflation is the nemesis of the Fed. Inflation fears could even force the Fed to remove liquidity or “accommodation” from the financial system.  Meaningfully higher interest rates would cool off stocks and real estate. And the US debt-service on the interest alone could grow to near $1 trillion/yr  if short rates moved up to 3 or 4% and long rates to 6 or 7% (current Federal debt is over $28 Trillion–do the math).

The existential question on Wall St. today is whether the stimulus and (along with other potential factors) will bring inflation. That discussion would take pages to clarify, but suffice it to say that though their criteria differ, a number of prominent economists (one of whom I edit for) think that after thirty years of falling inflation, rising inflation is on the horizon.

I might root for Kong in the Movie, but I am not sure I will be beating my chest to root on higher inflation.

WRH