The end will come – sooner or later – for the big bull market in US stocks… and for the debt bubble. But it didn’t come yesterday. Will it come today or tomorrow? We don’t know. All we know is you want to be prepared.
Today, we explore the time that land forgot. That phrase doesn’t really make any sense, but we wanted to try it out anyway. We’re talking about the space on the calendar filled by “eventually” and “sooner or later” – that part of the future where things that can’t last forever finally stop.
Specifically, we wonder about when and how the biggest debt bubble in history finally blows up. Recall that Planet Debt added $30 trillion to its burdens in the last six years – a 40% increase. That can’t continue forever.
But how does it end? Inflation… deflation… hyperinflation… hyper-deflation?
To make a long story short, a bubble can’t blow up without a lot of “flation” of some kind. And with a bubble so big, it’s bound to be a humdinger. Most likely, we will see “flation” in all its known forms. And maybe in forms we haven’t heard of yet.
You can argue about what effect QE and ZIRP have had on the economy… and what the effect will be when they are withdrawn. But there is no doubt that microscopic interest rates have done their job.
People who could borrow at the Fed’s low rates did so.
Washington borrowed more heavily than ever before – just to cover operating expenses. Corporations borrowed, too – mainly to refinance existing debt at lower interest rates and to buy back shares (raising the price of remaining shares and, coincidentally of course, giving management bigger bonuses).
The most recent figures we have are from the third quarter of 2013. Those three short months saw $123 billion of buybacks of US shares – up 32% from the same period a year before.
If that rate were to persist throughout 2014, it would mean nearly half a trillion dollars devoted to boosting corporate stock prices, coming from the same corporations that issued shares in the first place.
Is management stupid… or just greedy?
The sage advice of “buy low, sell high” doesn’t seem to have sunk in. At the bottom of the crash in 2008-09, reports Grant’s Interest Rate Observer, hardly any US corporations availed of the opportunity to buy their own shares at a bargain price. Now that prices are high again, almost all of them want to buy.
Surely, that is also something that must end… especially if rates rise and the cost of carrying new debt to fund new buybacks rises. It doesn’t take a lot of imagination to foresee what will happen when it stops: Stock prices will fall.
First, credit expands, and asset prices rise. Then credit shrinks, and asset prices fall. Asset prices typically foreshadow consumer prices.
After so much inflation in credit, we’d expect to see a helluva deflation when the bubble bursts. All of a sudden the Fed’s treasured “wealth effect” would become the “poverty effect” – with consumers cutting back on expenses, investments and luxuries.
This would be normal, natural and healthy. A debt deflation doesn’t create bad debts or bad investments. It just forces people to own up to their mistakes.
Businesses go broke because they can no longer borrow nearly unlimited funds at nearly invisible yields. People can once again default… and have plenty of company in doing so. The $5 trillion in paper wealth that came into being – almost magically – as the stock market rose… suddenly disappears from whence it came.
There is no mystery about the credit cycle. Wealth created “on credit” goes away when the credit is cut off. Then you find out who’s made the most serious mistakes.
The open questions are: How big can this bubble get before it explodes? And how will central bank meddling affect the outcome?
The first question gets the obvious reply: Who knows?
The answer to the second question is more nuanced. Central banks are still at it – led by the US and Japan. The government and corporate sectors are still willing borrowers.
Governments are borrowing to cover their deficits. Corporations are still borrowing to buy back their shares. Stock prices are still rising. But there are now signs that momentum is leaving the market. Our advice: Get out while you still can.
Regards,
Bill
Editor’s Note: Are you ready for the coming collapse Bill sees coming? Do you have an investment plan in place to deal with a demise of the dollar-based monetary system? If not, we recommend you read the free report our senior analyst, Braden Copeland, has put together. It explains in detail the coming collapse… and the simple steps you can take to protect what’s yours. Find out how to protect your savings here.
