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First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation

First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats.

The conventional view is the Federal Reserve creating trillions of dollars out of thin air will trigger inflation. Not so fast. Yes, creating trillions of dollars out of thin air will eventually devalue the purchasing power of each dollar–what we call inflation–but first all the unprecedented asset bubbles will pop and valuations will crash.

Let’s call this a deflationary deluge as unsustainable asset prices are eroded by a hard rain of reality. To understand the enormity of the current bubbles, please glance at the charts below. The first chart depicts recent stock market bubbles; note the extreme height of the current bubble.

The next chart shows the S&P 500, and the extraordinary amplification of the bubble that reached its apex in February 2020. Note that each ramp higher takes less time to reach its peak. The most recent snapback rally gained about 870 points in a mere two months–a move that took roughly 5 years in the early 2000s.

Real estate and other assets have also soared in unprecedented bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now supposedly worth over $1 million.

What made this possible? An equivalent bubble in debt. Every sector–household, corporate and government–has borrowed astronomical sums of money to keep the bubble economy glued together. In this rising tide of currency and capital, whatever had scarcity value–real estate, art, stocks–was purchased with the borrowed money as a store of value and / or as a source of income in a world starved of low-risk yields by central banks that dropped interest rates to near zero.

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