Originally Posted By ContrarianIndi⏩

Originally Posted By VegasLifter26⏩

Originally Posted By NotBanned4Good⏩

Originally Posted By ContrarianIndi⏩

Originally Posted By Slaydom⏩

Originally Posted By swoleyo⏩

Originally Posted By ContrarianIndi⏩

Originally Posted By ContrarianIndi⏩

Originally Posted By rootcon⏩

Originally Posted By lockdev⏩

Originally Posted By Anachron⏩

In the wake of the September 2008 Lehman bankruptcy, it was clear that troubles in the U.S. economy had serious ramifications for the rest of the global economy. Indeed, the bursting of a U.S. housing and credit bubble had ripple effects throughout world financial markets, which precipitated what economists now call the Great Economic Recession.

Fast forward to 2021. Now, America’s massive monetary and fiscal policy experiment is being conducted against the backdrop of a so-called everything asset and credit price bubble, which is very much larger and more pervasive than the earlier U.S. housing and credit market bubble.

It is not simply that U.S. equity valuations are at the lofty levels last experienced on the eve of the 1929 stock market crash. Nor is it that the dubious Bitcoin market now has a valuation in excess of $1 trillion. Rather it is also that very risky borrowers, especially in the highly leveraged loan market and in the emerging-market economies, can raise money at interest rates not much higher than those at which the U.S. government can borrow.

Today’s everything bubble has been inflated by the extraordinarily low interest rates produced by the massive amount of central bank money printing in response to the coronavirus pandemic. This raises the question as to what happens when the pleasant easy money music stops and interest rates start to rise. Past experience would suggest that when that happens, bubbles will start bursting and the emerging market economies will run into serious trouble as money is repatriated to the United States.

Recently, I discussed the “Two Pins That Pop The Bubble,” specifically noting the risk of rising interest rates and inflation. However, the real threat is not just the stock market bubble’s deflation but rather blowing up the “everything bubble.”

During previous periods in financial history, the focus was primarily on the deflation of a singular market bubble.

The flood of liquidity and ultra-accommodative monetary policies has simultaneously inflated multiple bubbles. Stocks, bonds, real estate, and speculative investments have all experienced historic inflations.



There is little argument that financial markets are currently in a “bubble.”The monthly chart of the S&P 500 shows the deviation from long-term monthly means at levels not seen since 1990.





During a “market mania,” investors must continue to rationalize overpaying for assets to keep prices moving higher. Over the last decade, the most common justification remains that low discount rates justify high valuations.

The problem comes when interest rates rise. Throughout history, an unexpected surge in interest rates has repeatedly led to poor investor outcomes.



Despite media rhetoric that “rising rates” aren’t a problem for the stock market, history suggests they are.Given the massive surge in corporate leverage promulgated by weak economic growth, higher rates will quickly impact corporate profitability and financing activities.

Currently, there is also a “bubble” once again in housingas a continual suppression of borrowing costs, loose lending policies, and a flood of stimulus has led to a historical surge in home prices. As we noted previously in “There Is No Supply Shortage,” home price appreciation has once again eclipsed long-term price trends.

The current overvaluation in homes, of course, is driven by record-low mortgage rates.



However, as noted above,that economic support will quickly reverse as interest rates rise.Given there is a surging demand for homes, just as with the stock market, when rates rise, there will be a rush to sell to a diminishing pool of buyers.

Also, as with the stock market, owned by the top 20% of income earners, most houses bought were by that same fraction of the population. [Higher incomes and nearly perfect credit].

Of course,there is nowhere more at risk from higher rates than the bond market itself.Given that “yield” is a function of price, there is a perfectly negative correlation between prices and interest rates.

The Federal Reserve problem is they have now pushed “yield spreads” across the entirety of the credit spectrum to record lows.The Fed’s suppression of rates to “bail-out” the bond market in the short-term has created a long-term problem of “mispricing risk.”

That mispricing of risk, or rather the creation of “moral hazard,” in the credit markets created a record number of “zombie” companies in the process.



Eventually,when rates rise enough, these “zombie” companies will be unable to refinance debt for their continued survival. Once bankruptcies begin to spike uncontrollably, investors will demand to get paid for their investment risk.As shown, such has occurred in the past with relatively dismal outcomes.

What should be clear is that if the rise in interest rates approaches 2% or higher, there are many problems embedded in an economy laden with nearly $85 trillion in debt.

The US economy is literally on perpetual life support. Recent events show too clearly that unless fiscal and monetary stimulus continues, the economy will fail and, by extension, the stock market.

However, the Fed currently has no choice.

Such is the consequence, and problem, of getting caught in a “liquidity trap.”

What the average person fails to understand is that the next “financial crisis” will not just be a stock market crash, a housing bust, or a collapse in bond prices.

It could be the simultaneous implosion of all three.

Originally Posted By CYBORG1⏩

Originally Posted By CYBORG1⏩

Originally Posted By Visel⏩

Originally Posted By ContrarianIndi⏩