With the Fed shifting from quantitative easing (QE) to quantitative tightening (QT) in recent years, and the end of unconventional monetary policy, interest rates are set to continue to rise as the central bank reduces its balance sheet. With bond yields already going up and volatility at all-time lows, questions remain about how the market will react to this normalization process. One thing is for certain, however: the recent rise of prices across several asset classes has coincided with the years of QE beginning in 2008. Home prices have soared, bond prices have soared, equity prices have soared, college tuition has soared, and even precious metals have soared (along with cryptocurrencies in recent months). While some commentators are alleging that we are now in the “everything bubble,” the reality is that what is being seen is really nothing more than inflation in the works. The trillions of dollars of liquidity pumped into the markets by the Fed and other central banks (they are all essentially running the same play book) has caused investors to want to divest of fiat cash holdings and invest in real assets—whether that is a home, government debt, gold or a diploma. With China set to challenge the hegemony of the Petrodollar with its own gold-backed yuan oil futures contract, keeping one’s savings in USD makes less and less sense. Even if the USD were to recover from its recent deterioration compared to the Euro or the Renminbi, the damage has already been done by QE and investors know it: the purchasing power of the dollar will never be as high tomorrow as it was prior to QE—and,...

For this reason—and knowing that interest rates would be rising—it made sense to make a large purchase, while I could obtain the credit to do so, and buy a home.
Other factors to consider include Real Gross Domestic Product (GDP) and Real Personal Consumption Expenditures (PCE). Real PCE has essentially stayed the same over the last 10 years (between .68 and .69), indicating that the FED’s unconventional monetary policy has not worked to kick-start the economy in any meaningful way.

And while Real GDP has risen from 14938 in 2007 to 17163 in 2017, the measures of Real GDP may not be as effective in determining economic health as the FED might have the public believe, especially when one considers the effect of the shadow or hidden economy (Dixon, 1998).

What is interesting to note is that GDP has increased while PCE has stagnated. Using the Expenditure Approach, GDP is measured by totaling the money spent on 4 categories: Consumption (C), Investment (I), Government (G), and Exports minus Imports (X-M). GDP = C + I + G + (X-M). PCE uses the same data points as GDP but focuses on consumption whereas GDP is said to measure production. If consumption is only moving sideways and production is supposedly going up—what can be determined from this? It is possible that wealth is being distributed among the majority of the populace but rather consolidated, with profits from production rolling into the pockets of the 1%.

Another indicator of the condition of the economy is the Effective Federal Funds Rate…