Equity markets are really high right now. And they’re completely broken. That much we’ve established.
As Michael Coolbaugh detailed yesterday, the global bond market is showing signs of a similar rot.
The Dow Jones Industrial Average, the S&P 500 Index, and the other major equity indices aren’t in nosebleed territory because the U.S. economy and Corporate America’s profits are robust and strong.
How Indices Crash
No; a fearless Wall Street is levitating because traders, speculators, and algorithms alike know their monetary central planners dare not risk a hissy fit at such a stage in history.
So, time and again, they front-run an expected easing move. And they’ve been rewarded by the Federal Reserve’s ritual capitulation. What these insatiable speculators overlook is that even no good thing lasts forever.
There’s a cumulative time dimension to these central bank-blown bubbles; the longer they grow, they bigger they get, the worse the consequences of their inevitable implosion.
At tippy-tops of mania cycles like these, even Wall Street runs out of Greater Fools. That’s the moment of reckoning. Giant air pockets open up on trading charts. No bids are to be found. Machine-driven selling accelerates.
And the indices crash.
As Michael noted on Thursday, this time is not different.
If anything, we’re setting up for something historic, a crash that completely resets the global political, economic, and financial system.
That’s because – percolating beneath this going-on-126-months-old stock-market rally – is the Mother of all Bond Market Bubbles. The bell actually rang in the wee hours of August 21, 2019, when Germany sold a 30-year bond with a 0.0% coupon.
No, it didn’t go off at a deep discount to par, in the manner of the old-style appreciating zero-coupon bond gambit. To the contrary, it sold at a premium, pushing the yield to -0.11%.
Can We Make This Insanity Any Plainer?
Folks, the global bond market – accounting for sovereigns, quasi-sovereigns, corporates, and junk – adds up to about $90 trillion. It is the foundation of the current system – and it’s also the foundation of the current Everything Bubble.
Governments have borrowed trillions at deeply sub-economic interest rates to essentially pay for bailouts, entitlements, and health care. All of that, of course, sickeningly, gets counted as “growth” in the gross domestic product statistics.
At the same time, corporations have borrowed trillions more to fund buybacks, mergers and acquisitions (M&A), and other forms of leveraged recapitalization to goose stock prices.
When the bond bubble breaks, it’ll be Katie-bar-the-door time on Wall Street… and Main Street.
Consider the fact that just 150 basis points of normalization on the U.S. Treasury yield curve would boost annual federal interest costs by $250 billion right now… and by another $500 billion a few years down the road because of the explosive growth of public debt that’s already baked into the cake.
The U.S. economy, like the global one, is cyclically weak. They’re both structurally impaired, too. These are consequences of the lunatic money-pumping policies of the Fed and its fellow monetary central planners.
First Malinvestment, Then the Crash
Corporate America has made a mockery of the Donald’s tax cut. The fact that upwards of $400 billion of rebates during 2018 and 2019 combined have been paid for on Uncle Sam’s credit card is bad enough.
But the evidence is now utterly dispositive: The overwhelming share of the increased corporate cash flows went into buybacks and M&A, not enhanced investment in productive plant, equipment, technology, and software.
Available corporate cash has been funneled back to Wall Street. There it works to shift existing wealth to speculators and the stock-owing classes. Productive investment in Main Street growth and efficiency has been drastically – perhaps catastrophically – shortchanged.
The world is now awash in malinvestment.
Next comes the crash.
And it’s going to get obscene.
If You Believe, You Must Act
Desperate times call for… “common sense” measures.
And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.
We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.
I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”
All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…