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The Crash Of The “Everything Bubble” Started In 2018 – Here’s What Comes Next In 2019

The Crash Of The “Everything Bubble” Started In 2018 – Here’s What Comes Next In 2019

everything bubble

In 2018, a very significant economic change occurred, which sealed the fate of the U.S. economy as well as some other economies around the globe. This change was the shift of central bank policy. The era of stimulus and artificial support of various markets, including stocks, is beginning to fade away as the Federal Reserve pursues policy tightening, including higher interest rates and larger cuts to its balance sheet.

I warned of this change under new Chairman Jerome Powell at the beginning of 2018 in my article ‘New Fed Chairman Will Trigger Stock Market Crash In 2018’. The crash had a false start in February/March, as stocks were saved by massive corporate buybacks through the 2nd and 3rd quarters. However, as interest rates edged higher and Trump’s tax cut cash ran thin, corporate stock buybacks began to dwindle in the final quarter of the year.

As I predicted in September in my article ‘The Everything Bubble: When Will It Finally Crash?’, the crash accelerated in December, as the Fed raised interest rates to their neutral rate of inflation and increased balance sheet cuts to $50 billion per month.

It is important to note that when we speak of a crash in alternative economic circles, we are not only talking about stock markets. Mainstream economists often claim that stocks are a predictive indicator for the future health of the wider economy. This is incorrect. Stocks are actually a trailing indicator; they crash long after all other fundamentals have started to decline.

Housing markets have been plunging in terms of sales as well as prices. The Fed’s interest rate hikes are translating to much higher mortgage rates in the wake of overly inflated values and weaker consumer wages. .

…click on the above link to read the rest of the article…

The Everything Bubble Has Met Its Needle… and It’s Named Jerome Powell

The Everything Bubble Has Met Its Needle… and It’s Named Jerome Powell

In December, Jerome Powell confirmed that he is going to implement a financial reset.

That reset will crash stocks.

We know this because the Fed didn’t even HINT at tapering its Quantitative Tightening program at this latest Fed FOMC despite stocks staging the worst December since the Great Depression.

This tells us that the Powell Fed is going to normalize the Fed’s balance sheet no matter what. And THAT is the real issue for the financial markets (the withdrawal of liquidity) NOT rate hikes/cuts.

This is what the market is reacting to. Stocks now know that the era of easy money is over. The Fed is being run by a man who doesn’t see it has his job to create/sustain asset bubbles.

And that is why The Fed Has Confirmed It Will Crash Stocks

In December, Jerome Powell confirmed that he is going to implement a financial reset.

That reset will crash stocks.

We know this because the Fed didn’t even HINT at tapering its Quantitative Tightening program at this latest Fed FOMC despite stocks staging the worst December since the Great Depression.

This tells us that the Powell Fed is going to normalize the Fed’s balance sheet no matter what. And THAT is the real issue for the financial markets (the withdrawal of liquidity) NOT rate hikes/cuts.

This is what the market is reacting to. Stocks now know that the era of easy money is over. The Fed is being run by a man who doesn’t see it has his job to create/sustain asset bubbles.

And that is why we are going to crash.

…click on the above link to read the rest of the article…

The Bubble’s Losing Air. Get Ready for a Crisis

The Bubble’s Losing Air. Get Ready for a Crisis

Investors need to focus on their response to financial stresses in an era in which policymakers will be constrained.

Not much to do once it pops.

Photographer: Spencer Platt/Getty Images

The “everything bubble” is deflating. The fact that it’s happening relatively slowly shouldn’t blind us to the real threat: The world is dangerously underestimating how hard it’ll be to deal with the fallout once it pops.

Frothy markets can’t disguise the warning signs. The shift to tighter monetary policies in the West is putting pressure on global equity and real-estate values. Even more critically, it’s weakening credit markets. Over-indebted emerging markets face headwinds from rising borrowing costs and dollar shortages.

At the same time, investors are underestimating how disruptive trade conflicts and sanctions could turn out to be. That’s not to mention rising non-financial risks — from the legal difficulties of the U.S. administration, to the U.K.’s Brexit debacle, to political instability in France, Germany, Italy and even Saudi Arabia. Uncertainty will impact the real economy, primarily through the wealth effect of declining asset values and a reduced supply of credit.

Investors need to start focusing on how best to respond to a new crisis. The choices are more limited than many realize. Historically, central banks have needed to slash official rates as much as 4-5 percent in order to offset the effects of a financial crisis or an economic slowdown. That’s why former U.S. Federal Reserve Chair Janet Yellen talked about the need to raise rates in good times — to provide room to cut when necessary.

…click on the above link to read the rest of the article…

This Is How the “Everything Bubble” Will End

This Is How the “Everything Bubble” Will End

I think there’s a very high chance of a stock market crash of historic proportions before the end of Trump’s first term.

That’s because the Federal Reserve’s current rate-hiking cycle, which started in 2015, is set to pop “the everything bubble.”

I’ll explain how this could all play out in a moment. But first, you need to know how the Fed creates the boom-bust cycle…

To start, the Fed encourages malinvestment by suppressing interest rates lower than their natural levels. This leads companies to invest in plants, equipment, and other capital assets that only appear profitable because borrowing money is cheap.

This, in turn, leads to misallocated capital – and eventually, economic loss when interest rates rise, making previously economic investments uneconomic.

Think of this dynamic like a variable rate mortgage. Artificially low interest rates encourage individual home buyers to take out mortgages. If interest rates stay low, they can make the payments and maintain the illusion of solvency.

But once interest rates rise, the mortgage interest payments adjust higher, making them less and less affordable until, eventually, the borrower defaults.

In short, bubbles are inflated when easy money from low interest rates floods into a certain asset.

Rate hikes do the opposite. They suck money out of the economy and pop the bubbles created from low rates.

It Almost Always Ends in a Crisis

Almost every Fed rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always filters back to U.S. markets.

Specifically, 16 of the last 19 times the Fed started a series of interest rate hikes, some sort of crisis that tanked the stock market followed. That’s around 84% of the time.

You can see some of the more prominent examples in the chart below.

…click on the above link to read the rest of the article…

Mad World

MAD WORLD

And I find it kinda funny, I find it kinda sad
The dreams in which I’m dying are the best I’ve ever had
I find it hard to tell you, I find it hard to take
When people run in circles it’s a very very
Mad world, mad world

Image result for the primal scream

The haunting Gary Jules version of the Tears for Fears’ Mad World speaks to me in these tumultuous mad times. It must speak to many others, as the music video has been viewed over 132 million times. The melancholy video is shot from the top of an urban school building in a decaying decrepit bleak neighborhood with school children creating various figures on the concrete pavement below. The camera pans slowly to Gary Jules singing on the rooftop and captures the concrete jungle of non-descript architecture, identical office towers, gray cookie cutter apartment complexes, and a world devoid of joy and vibrancy.

The song was influenced by Arthur Janov’s theories in his book The Primal Scream. The chorus above about his “dreams of dying were the best he ever had” is representative of letting go of this mad world and being free of the monotony and release from the insanity of this world. Our ego fools us into thinking the madness of this world is actually normal. Day after day we live lives of quiet desperation. Despite all evidence our world is spinning out of control and the madness of the crowds is visible in financial markets, housing markets, politics, social justice, and social media, the level of normalcy bias among the populace has reached astounding levels, as we desperately try to convince ourselves everything will be alright. But it won’t.

…click on the above link to read the rest of the article…

How The Bubbles In Stocks And Corporate Bonds Will Burst

How The Bubbles In Stocks And Corporate Bonds Will Burst

As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:

To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.

Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.

Corporate Grade Bonds - LQD

Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peakwhich was already a precariously high level to begin with.

Corporate Debt

U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:

…click on the above link to read the rest of the article…

Hilarious How Wall-Street Crybabies Whine about the Fed’s QE Unwind after a Decade of “Wealth Effect”

Hilarious How Wall-Street Crybabies Whine about the Fed’s QE Unwind after a Decade of “Wealth Effect”

Their “Everything Bubble” is being pricked “gradually,” and they don’t like it.

Wall Street has been moaning, groaning, and crying out loud about the Fed’s current monetary policies – raising rates and unwinding QE. They fear that these policies will undo the Fed’s handiwork since the onset of QE and zero-interest-rate policy in 2008, now called the “Everything Bubble” (stocks, bonds, “leveraged loans,” housing, commercial real estate, classic cars, art…). In an effort to pressure the Fed to back off, they’re accusing the Fed of making a “policy mistake” and creating “scarcity” of bank reserves.

Here is Bloomberg News this morning. It’s really cute how this works. This is how the article starts out: “Fixed-income traders are telling the Federal Reserve that it might end up making a big policy mistake.”

These folks cannot say that the Fed’s QE unwind and higher rates might unwind some of the wealth of asset holders that resulted from the Fed’s desired “wealth effect.” That would be too clear. So they have to come up with hoary theories to back their “policy mistake” theme. This time it’s the theory of a “scarcity of bank reserves.”

When these folks talk about “scarcity,” what they mean is that they have to pay a little more. In this case, banks are having to pay more interest to attract deposits.

For the crybabies on Wall Street, that’s “scarcity.” For savers, money-market investors, and short-term Treasury investors, however, it means the era of brutal interest rate repression has ended, and that they’re earning once again more than inflation on their money (savers might have to shop around).

But that the money from depositors is suddenly not free anymore is anathema on Wall Street. So here we go – this time specifically targeting the QE unwind. Bloomberg:

…click on the above link to read the rest of the article…

End Of The Financial World?

End Of The Financial World?

Predicting the end of the world, physical or financial, is seldom helpful.

If the prediction is correct, how do you profit from the insight? If the prediction is wrong and the “end of the world” is delayed (typical), you lose credibility.

An estimate of risk versus reward based on an analysis of current information is more useful.

Assessment: The 2018-2020 risk for most asset classes, such as stocks, bonds, corporate debt, and real estate is high while the potential reward in those asset classes is low. Gold and silver are opposite. Their long-term risk is low (September 2018) and their long-term potential reward is huge.

From Goldman Sachs:

OPINIONS AND FACTS SUPPORTING RISK/REWARD ASSESSMENT:

The central banks and the financial world created an “everything bubble.” This includes the stock market, bond market, housing, student loans, sub-prime auto loans, emerging markets, fiat currencies, and central bank credibility.

Low interest rates enable bubbles!

Bubbles always burst or implode. People want to believe “this time is different,” but it usually isn’t. Bubbles will implode and cause huge damage, especially to the middle and lower classes in the United States. Remember the crashes of 1987, 2000 and 2008. Each one seemed more destructive and broader in its reach than the previous crash. What will the crash of 2018 – 202? create?

If it can’t continue, it will stop – someday. Total debt – national, household, corporate, sovereign and more – has increased exponentially since 1913 when the Federal Reserve… you know the drill.

Use national debt for example. Begin the calculations in 1913, 1971, 1980, 2000 or whenever. The rate of increase in the official national debt varies but on average the debt increased by 8% to 9% every year and doubles every eight to nine years. Consider the implications of runaway debt, out of control spending, and no political will to manage spending, debt, or expansion of government, Medicare, military expenditures etc.

…click on the above link to read the rest of the article…

The Everything Bubble: When Will It Finally Crash?

The Everything Bubble: When Will It Finally Crash?

Much like the laws of physics, there are certain laws of economics that remain constant no matter how much manipulation exists in the markets. Expansion inevitably leads to contraction, and that which goes up must eventually come down. Central banks understand this reality very well; they have spent over a century trying to exploit those laws to their own advantage.

A common misconception among people new to alternative economics is the idea that central banks only seek to keep the economy afloat, or keep it expanding forever. In reality, these institutions and the money elites behind them artificially inflate financial bubbles only to deliberately implode them at opportunistic moments.

As I have outlined in numerous articles, every economic bubble and subsequent crash since 1914 can be linked to the policy actions of central bankers. Sometimes they even admit to culpability (to a point), as Ben Bernanke did on the Great Depression and as Alan Greenspan did on the 2008 credit crisis. You can read more about this in my article ‘The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious.’

Generally, central bankers and international bankers mislead the public into believing that the crashes they are responsible for were caused “by mistake.” They rarely if ever mention the fact that they often use these crises as a means to consolidate control over assets, resources and governments while the masses are distracted by their own financial survival. Centralization is the name of the game. It is certainly no mistake that after every economic implosion the wealth gapbetween the top 0.01% and the rest of humanity widens exponentially.

Yet another crash is being weaponized by the banks, and this time I believe the motivations behind it are rather different. Or at least the goals are supercharged.

…click on the above link to read the rest of the article…

Gold in the “Everything Bubble”: Effective Diversification?

Gold in the “Everything Bubble”: Effective Diversification?

What do you do when nearly all asset classes are overvalued?

Diversification is one of the oldest principles by which people try to hang on to their wealth, however little they might have. Don’t put all your eggs in one basket, it goes. Diversification is not designed to maximize profits or minimize costs. It’s designed to get you through a smaller or larger fiasco, not necessarily unscathed but with at least some of your eggs intact so that you can go to market another day. This search for stability is a critical concept when looking at gold as diversification of risk in other asset classes.

There are many reasons to own or trade gold that are beyond the scope of my thoughts here on diversification. So I’ll leave them for another day.

The classic and most basic diversification for American households has been the triad of stocks, bonds, and real estate. In the past, it was often held that when stocks go up, bonds decline. This has to do in part with the Fed, which tends to raise rates when things get hot, thus driving up bond yields (which means by definition that bond prices decline). So stocks and bonds balanced each other out to some extent.

Throw in some leveraged real estate – the house you live in – and in the past, your assets were considered sufficiently diversified.

But this no longer applies today: Stocks, bonds, and real estate – both residential and commercial – all boomed together since the onset of QE in 2009. Other asset classes boomed to, including art and classic cars. Almost everything went up together in near lockstep. For a while, gold and silver, which had been on a surge since 2001 continued to surge. In other words, it was very difficult to achieve actual diversification.

…click on the above link to read the rest of the article…

BCA: The “Bubble In Everything” Threatens $400 Trillion In Assets

By now, it’s a very familiar question: how high can the Fed hike rates before it causes a major market “event.”

Two weeks ago, Stifel analyst Barry Banister became the latest to issue a timeline on how many more rate hikes the Fed can push through before the market is finally impacted. According to his calculations, just two more rate hikes would put the central bank above the neutral rate – the interest rate that neither stimulates nor holds back the economy. The Fed’s long-term projection of its policy rate has risen from 2.8% at the end of 2017 to 2.9% in June. As the following chart, every time this has happened, a bear market has inevitably followed.

A similar argument was made recently by both Deutsche Bank and Bank of America, which in two parallel analyses observed last year that every Fed tightening cycle tends to end in a crisis.

Now, it’s the turn of BCA research to warn that ultimately the fate of risk assets depends on the relative size of the inflationary impulse being spawned by the Fed vs the remnant disinflationary impulse from monetary policies over the past decade.

In a report issued on Friday, BCA’s strategists make the key point that the performance of bonds – and stocks – in an inflation scare would depend on the relative size of the inflationary impulse compared with the disinflationary impulse that resulted from sharply lower risk-asset prices.

They make the point that if central banks were more concerned about the inflationary impulse, which at least for Fed chair Powell appears to be the case for now – Janet Yellen’s “lower for longer revised forward guidance” notwithstanding – they would have to keep tightening – in which case, bond yields would be liberated to reach elevated territory.

…click on the above link to read the rest of the article…

Housing Bubble and Everything Bubble in One Simple Picture

To understand the magnitude of the housing bubbles simply compare the index of wages to the index of prices.

How Did We Get Here?

That’s easy.

Average Wages vs CPI

Note the correct CPU comparison for this chart is CPI-W not CPI-U, not that it matters much.

No matter what official CPI one uses, the chart is a joke. Why? The CPI only reflects rent, not actual housing prices.

The Fed made this mistake during the housing bubble and they made it again from 2011 to present.

More bubbles will burts and that is very deflationary. By chasing its tail, the Fed creates the very conditions it seeks to prevent.

Price Deflation Not a Problem

For years, the Fed desperately sought more inflation. However, a BIS Study on the Historical Costs of Deflation shows routine price deflation is not a problem.

According to the BIS, “Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive.”

Meanwhile, people keep faith in the Phillips’ Curve. It’s pathetic.

Related Articles

Doug Duncan: Even US Government Economists Predict Trouble Ahead

Doug Duncan: Even US Government Economists Predict Trouble Ahead

Fannie Mae forecasts an economic slowdown by 2019

Doug Duncan is not your average beltway economist.

The chief economist for Fannie Mae is surprisingly outspoken about the troublesome outlook for the US economy. He’s worried about the rising cost of debt service as outstanding credit continues to mount at the same time interest rates are starting to ratchet higher, too.

He predicts the US will enter recession within a year, concurrent with a topping out of America’s real estate market. It wouldn’t surprise him to see the stock market falter, too, as central banks around the world begin a coordinated tightening of monetary policy and — similar to the thoughts recently expressed within our podcast with Axel Merk — Doug expects Jerome Powell to be much more reluctant to intervene in attempt to support asset prices. Having met personally with Powell, Doug thinks the Fed is now happy to see some of the air come out of the Everything Bubble (just not too much and not too fast) — a market change from past Fed administrations:

Our forecast definitely sees slowing economic activity, particularly in the second half of ’19. Part of it has to do with the length of the expansion. Just because an expansion is long doesn’t mean it’s going to end; but they all have eventually ended, and this one is getting pretty old. I think if it’s not the second longest, it’s getting to be the second longest that we’ve ever had shortly.

The tax bill was viewed differently by different parties, but the capital markets initially took that — plus the $300 billion agreement to get past the expiration of government funding plus the budget agreement — they took all those things as inflationary.

…click on the above link to read the rest of the article…

The Everything Bubble—Waiting For The Pin

The Everything Bubble—Waiting For The Pin

Yesterday we noted that financial markets have become completely uncoupled from reality and that the recent feeble bounces between the 20-day and 50-day chart points were essentially the rigor mortis of a dead bull. As it happened, we were able to share those sentiments with what remains of CNBC’s audience of carbon-based units:

As we also noted as per the chart point mavens, the 20-day average down at 2703 (red line) on the S&P 500 was supposed to represent “support” while the  50-day average (blue line) purportedly functioned as “resistance”.Well, upon the official announcement of the Donald’s lunatic trade war, there she sat at yesterday’s close—less than one point under the 50-day moving average at 2739.8 (blue line).

But rather than “resistance”, which the raging robo-machines ripped through today like a hot knife through butter, we’d say the blue line represents the last frontier of sanity. That’s because a stock market trading at 25X earnings under today’s baleful circumstances is nothing less than a brobdingnagian bubble (i.e. a huuuge one) frantically searching for the proverbial pin.

We essay the razor sharp aspects of the pin below, but suffice it to say here that the cyclical calendar has just plain run out of time. It is way, way too late in the cycle at 105 months of age to be “pricing-in” anything except the end of the party. And this bubblicious party has embodied the most spectacular central-bank fueled mania yet—meaning that the morning after is going to bring a truly hellacious hangover.

^SPX Chart

Among the many sharp edges of the pin are these:

1) the virtual certainly of a recession within the next two years and a typical 30%-50% drop in earnings;

…click on the above link to read the rest of the article…

 

The ‘Everything Bubble’ and What Happens if Credit Freezes Up in a Credit-Based Economy

The ‘Everything Bubble’ and What Happens if Credit Freezes Up in a Credit-Based Economy

“It could get really messy.”  Wolf Richter on the X22 Report

The US government bond market has soured, even the 10-year yield is surging, and mortgage rates have jumped. Read… What Will Rising Mortgage Rates Do to Housing Bubble 2?

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