The Biggest Bubble In Human History Is Starting to Deflate (Not Stocks) – Mike Swanson (03/05/2018)

Who knows what the stock market is going to do this week. It got hit hard last month and bounced and wobbled last week. The robots held the 2662 level on the S&P 500, which is the 50% retracement of the February low and recent rally high, but that might not hold this month.

If it doesn’t look for a drop to the 200-day moving averages and more trouble.

The thing is that all everyone in the markets tends to look at is what the stock market is doing and just about everyone is bullish right now as my favorite stock market sentiment indicator hit an extreme in bullishness for all my years of trading just a few weeks ago.

And right now there is a US dollar bear market, but no one cares.

And no one notices, because almost all of us, myself included, simply focus on what the stock market is doing.

But right in front of us the biggest bubble in human history appears to have toppped and is starting to deflate.

This will be the defining factor of the next few years.

I’m talking about interest rates and bond prices (the two move opposite to one another so on yields on a bond go down it’s price goes).

After 2008 the Federal Reserve and central banks around the world lowered interest rates to zero and then engaged in “QE” money printing programs to buy bonds and make stocks go up.

When the market dumped in 2010 and 2011 for a few weeks the answer became more QE.

And in 2016, which was the last time the Nasdaq fell 20% from a high, central banks in Europe launched a massive QE.

Those operations drove interest rates around the world to their lowest levels in ALL OF HUMAN HISTORY.

Look at this chart.

If you can remember back in 2016 there were government bonds in Europe that were yielding NEGATIVE interest rates.

This meant that if you bought them and held them you were guaranteed to lose money.

And people were doing it, because they though the bond prices would continue to rise!

Never before in human history had government bonds ever done that before.

And now those negative yields are gone.

But what all of this did was drive US corporate bonds to record highs and their yields to record lows.

So companies took advantage of that moment to borrow record amounts of money much of which they went to use for stock buybacks.

And that helped the stock market go up.

But now just a few weeks ago the US corporate bond market topped out and is now trading below it’s 200-day moving average to begin a new bear market.

In time as corporate bonds fall the buybacks will end as the cost for companies to issue new debt rises.

This is the biggest financial bubble in human history and it is now starting to deflate.

You can’t notice it yet, but in time it will have an impact on everything.

So in the coming years you can expect to see stocks and bonds go down together.

In 2008 it was a housing bubble bust that crashed the stock market that fall.

In the bear market before that it was a crash in internet stocks that drove everything else down.

The next bear market in the US stock market will be caused by falling junk bonds and the end of massive stock buybacks.

The biggest problem most Americans have right now though is not the fact that they own stocks and are bullish on them, but that they think they are in “safe” investments well diversified by having 1/3 or even 1/2 of their money in bonds that are not going to be safe in this next cycle and are going to go down.

This chart is the of the biggest and most widely owned bond ETF by American investors.

It’s for high grade corporate bonds and it yields 2.42%.

It is also down -2.41% year to date even though the stock market is down this year.

In the past bonds would go up when stocks fall, but that is no longer happening.

A 2.41% drop is not enough to scare anyone now, but in time bonds holders are going to get very angry when the losses grow and if it happens with stocks falling at same time it will become brutal.

Now I simply define a bear market as one in which something goes below its 150 and 200-day moving averages and those averages trend down and then act as resistance. That is now happening with bond funds and this looks like the textbook start of a new bear market that is going to last for years and hurt most American investors.

I believe the simple solution of course is to diversify out of bonds and US dollar centric investments with at least a portion of one’s money. That means looking at investing in gold in a serious way.

What I am talking about in this post is the biggest bubble in world history and perhaps the biggest financial turning point in the markets in our lifetime starting in front of our eyes and I have only touched the surface on this. We’re just looking at the charts not even talking about why this is happening.

Since 1980 there has been a secular bond bull market in which whenver stocks fell bonds went up.

That is what everyone is used too.

But now that whole game is changing!

Grab my new book The Two Fold Formula.

David Skarica also did a podcast on the bond bear. To listen click here.

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