The global bond bubble has begun bursting.
This process will not be fast by any means.
Central Banks and the political elite will fight tooth and nail to
maintain the status quo, even if this means breaking the law (freezing bank
accounts or funds to stop withdrawals) or closing down the markets (the Dow
was closed for four and a half months during World War 1).
There will be Crashes and sharp drops in asset prices (20%-30%)
here and there. However, history has shown us that when a financial system
goes down, the overall process takes take several years, if not longer.
By way of example let us consider the details surrounding the Tech Bubble:
the single largest stock market bubble of the last 100
years. In this case, the Bubble pertained to just one asset class
(stocks). In fact, the bubble was relatively isolated to one specific
sector, Tech Stocks.
And to top if off, it was absolutely obvious to anyone that it was a
Bubble: note that the Cyclical Adjusted Price to Earnings or CAPE ratio for
the Tech Bubble dwarfed all other bubbles dating back to 1890.
Stocks were so obviously overvalued that it was truly absurd.
And yet, despite the fact that this bubble was absolutely
obvious and involved only one asset class, it still took
investors well over six months after the initial 20% crash to
realize that the top was in and the bubble had burst.
Let that sink in for a moment. Stocks were clearly in a bubble. Indeed, it
was literally THE stock bubble of the last 100 years. And yet, when it burst,
there was no clear consensus as to where the market was heading.
My point with all of this is that even when the bubble was both very
specific AND obvious, the collapse was neither quick nor clean.
There were several large 20%+ crashes, but
overall, it was a roller coaster with jarring rallies than gradually wore its
way down.
And when you extend the collapse from peak to bottom, the whole collapse
took nearly three years.
To return to my initial point: the coming collapse in the financial
markets will take its time. This is particularly true this time around
because the bubble pertains to bonds: the senior-most asset class in the
financial system.
By way of explanation, let’s consider how the current monetary system
works…
The current global monetary system is based on debt. Governments issue
sovereign bonds, which a select group of large banks and financial
institutions (e.g. Primary Dealers in the US) buy/sell/ and control via
auctions.
These financial institutions list the bonds on their balance
sheets as “assets,” indeed, the senior-most assets
that the banks own.
The banks then issue their own debt-based money via inter-bank loans,
mortgages, credit cards, auto loans, and the like into the system. Thus,
“money” enters the economy through loans or debt. In this sense, money is not
actually capital but legal debt contracts.
Because of this, the system is inherently leveraged (uses borrowed money).
Consider the following:
1) Total currency (actual cash in the form of bills and coins)
in the US financial system is little over $1.2 trillion.
2) If you want to include money sitting in short-term accounts
and long-term accounts the amount of “Money” in the system is about $10
trillion.
3) In contrast, the US bond market is well over $38
trillion.
4) If you include derivatives based on these bonds, the
financial system is north of $191 trillion.
Bear in mind, this is just for the US.
Again, debt is money. And at the top of the debt pyramid are
sovereign bonds: US Treasuries, German Bunds, Japanese Government Bonds, etc.
These are the senior most assets used as collateral for interbank
loans and derivative trades. THEY ARE THE CRÈME DE LA CRÈME of our current
financial system.
So, this time around, when the bubble bursts, it won’t simply affect a
particular sector or asset class or country… it will affect the entire
system.
So.... the process will take considerable time. Remember from the earlier
pages, it took three years for the Tech Bubble to finally clear itself
through the system. This time it will likely take as long if not longer
because:
1) The bubble is not confined to one country (globally, the
bond bubble is over $100 trillion in size).
2) The bubble is not confined to one asset class (all
“risk” assets are priced based on the perceived “risk free” valuation of
sovereign bonds… so every asset class will have to
adjust when bonds finally implode).
3) The Central Banks will do everything they can to
stop this from happening (think of what the ECB has been doing in Europe for
the last three years)
4) When the bubble bursts, there will very serious political
consequences for both the political elites and voters as the system
is rearranged.
The size of the bond bubble alone
should be enough to give pause.
However, when you consider that these bonds are pledged as
collateral for other securities (usually over-the-counter derivatives) the
full impact of the bond bubble explodes higher to $555 TRILLION.
To put this into perspective, the Credit Default Swap (CDS) market
that nearly took down the financial system in 2008 was only a tenth of this
($50-$60 trillion).
On that note, we should point that the fuse is already lit on the global
debt bomb. Emerging Market bonds taking out their bull market trendline.
Junk bonds are also in the process of ending their mutli-year bull market.
The bursting of the bond bubble has begun. This process will take months
to unfold and it will culminate in a stock market crash.
Smart investors are preparing now.
We just published a 21-page investment report titled Stock Market
Crash Survival Guide.
In it, we outline precisely how the crash will unfold as well as which
investments will perform best during a stock market crash.
We are giving away just 1,000 copies for FREE to the public.
To pick up yours, swing by:
https://www.phoenixcapitalmarketing.com/stockmarketcrash.html
|