Chris’ note: Last week, I introduced you to the newest member of Legacy Research, Chris Weber.
And I showed you how he kickstarted an eight-figure financial fortune with a bet on gold that returned 10,000%.
I recently sat down with Chris to discuss his latest research.
He sees a rising number of parallels between today’s rapidly rising interest rates and market conditions before the Black Monday Crash of 1987. That one-day 22% drop in the markets has left a scar on anyone trading that day.
Read on below for my interview with Chris. We dive into how changes in interest rates can move an economy… and crash a stock market…
Chris Lowe (CL): You’re out with a warning on rising interest rates. You think it could lead to a crash on the scale of the notorious Black Monday crash in October 1987. But before we get into that, why do interest rates matter so much?
Chris Weber (CW): Most people are familiar with interest rates if they buy a house or a car. Interest rates are also important for people who have money on deposit in the bank.
But interest rates aren’t just important for us as individuals. They’re also important for the wider economy.
If they’re too low, then companies will borrow money and put it into projects that aren’t economic. And they don’t find that out until it’s too late. That’s what happened over the 12 years.
Central banks dropped interest rates below the inflation rate. On a “real” – or inflation-adjusted basis – banks and bondholders were paying businesses to borrow money.
And a lot of central banks set interest below zero, which is nonsensical.
So, businesses put a lot of money into places they shouldn’t have. Now that interest rates are rising again, the cost of carrying that debt is going up along with businesses’ costs.
There are also effects on the housing market. If you’re paying 2% or 3% interest on your mortgage, you’re not going to sell your house and get a new mortgage that will cost you 8%.
So, higher rates cause the economy to stagnate.
And most folks don’t fully appreciate how much rates have risen. The yield on the 10-year Treasury note was 0.5% three years ago. Now, it’s 4.8%.
That’s an almost 1,000% increase. That ripples through the economy. And it frightens people because they suddenly must pay so much more to borrow money.
CL: Wall Street is betting on interest rates heading lower again sometime next year as inflation continues to come under control again. Is that a good bet?
CW: That’s certainly what people want to hear. But remember, they wanted to hear that inflation was just a temporary thing, too. And here we are, and it’s nearly double the Fed’s 2% target.
What your readers need to understand is that from 1981 to roughly 2020 interest rates fell and fell and fell… and bond prices rose and rose and rose. In fact, this was the longest bull market for bonds in history.
The yield on the 10-year T-note hit an all-time high of 15.28% in September 1981. By August 2020, it hit a low of 0.5%.
Now, that long-term trend is reversing. Interest rates are rising, and bond prices are falling. This is the most important trend in the market today.
CL: What are some of the consequences of a bear market in bonds and a long-term rise in interest rates?
CW: Well, rising interest rates – if they persist – cause the economy to stagnate because it pushes up the cost of borrowing. They also tend to push stock prices down.
That’s why the late 1960s and 1970s was such hellish time for investors. In March 1966 the Dow hit 1,000 points. And in August 1982, it was at 700 points.
Over that time, the yield on the 10-year T-note went from 5.4% to a peak of 15.3%. And we had double-digit inflation from 1974 to 1975, then again from 1979 to the end of 1981. So, the stock market was a terrible place to be.
Rising rates were also one of the main factors that led to the that was the worst day Wall Street ever had – the Black Monday crash on October 19, 1987.
That day, the Dow plunged by 22.6%
You see, rates had been falling since October of 1981 when they peaked at 16.6%. And five years later, people were finally starting to be convinced that high rates, and high inflation, were gone. The 10-year T-note was about 7% on December 4, 1986.
But then it began to climb. In April 1987, the 10-year yield hit 8%. By August 31, it hit 9%. And by Friday, October 16, it stood at more than 10%.
CL: And you think that was what caused stock market investors to panic the following Monday?
CW: Yes. Something snapped in the minds of investors that weekend. The thought spread that interest rates were headed back to where they were in the bad old days of the 1970s unnerved people.
So, on Monday’s opening – October 19, 1987 – there was a massive imbalance between so many sell orders and so few buy orders. And stocks crashed.
The next morning, Fed boss Alan Greenspan issued a short statement saying that the Fed would do what it took to provide whatever money was needed.
That same day the Fed injected an amount of money into the system that equaled 7% of the entire monetary base of the nation.
CL: And you think something like that could happen today because of rising interest rates?
CW: I think we have to expect anything now. And that includes another crash. The Fed could react by adding trillions of new dollars to the economy. But this would be coming dangerously close to hyperinflation.
Also, politically, the state of the nation is not what it was in the Reagan years. Overall confidence levels are vastly different. So, we’re in uncharted waters now.
But that doesn’t mean there aren’t opportunities to profit elsewhere in the markets.
As I revealed in an interview that dropped this morning, I believe we’re at the start of a huge monetary shift. If you make the right moves, you can make hundreds or thousands of percent on your money.
If you don’t act, inflation and rising interest rates will continue eating away at your wealth until you have nothing.