The short answer is yes.
In the last 10 years not a single fundamental economic flaw has been fixed in the US, Europe, Japan, or China.
The Fed was behind the curve for years contributing to the bubble. Massive rounds of QE in the US, EU, and Japan created extreme equity and junk bond bubbles.
Trump’s tariffs are ill-founded as is Congressional spending wasted on war.
Potential Catalysts
- Junk Bond Bubble Bursting
- Equity Bubble Bursting
- Italy
- Tariffs
- Brexit
- Pensions
- Housing
- China
Many will blame the Fed. The Fed is surely to blame, but it is prior bubble-blowing policy, not rate hikes now that are the problem.
1. Junk Bonds
Many have labeled this an “everything bubble” which is not quite accurate. Yes, the Fed re-blew the housing bubble as well as an equity bubble. But the real standout is the bubble in junk bonds.
Companies are borrowing money to buy back shares at absurd valuations.
In the US, close to 15% of the companies in the S&P 500 only survive because they can roll over their debt. For discussion, please see Rise of the Zombie Corporations: Percentage Keeps Increasing, BIS Explains Why.
I expect a junk bond crash and that will take equities lower with it.
2. Equity Bubbles
Stock valuations are stretched almost beyond belief. The CAPE – Shiller PE was only surpassed by the DotCom bubble. The CAPE PE on October 3 when I last wrote about it was 33.49.
There will be few places to hide. GMO Forecasts US Equity Losses for 7 Years.
We may not see a “crash” per se, but if not, then expect a slow bleed over many years, Japanese style.
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