The US economy has been slowing down and economists are predicting that a major economic collapse is coming. In a recent interview, Guggenheim’s Global CIO Scott Minerd said that the cognitive dissonance in the stock market is stunning as reflected by the ever rising prices and credit spreads. He expressed that this is not a buy the dip market but don’t try to catch a falling knife markets because prices have been plummeting for weeks. The stock market collapse has already begun!
The global economy is already slowing down and investors have fear that this will culminate to the worse economic collapse in history. The stock market has a potential for more downside movement and at the same time the bond market has the lowest returns in history. The 10 year treasury bonds return is now hovering at 1.3 percent level. Technical analysis shows that this decline will continue to a point where the 10 year bonds will have a 0.25 percent return while the 30 year bonds are expected to plummet to about 1 percent level.
At the same time, the treasury yields are already making historic lows and credit spreads are remaining relatively tight. This doesn’t make any sense considering the fact that the fundamental drop indicates that there will be more defaults by energy, airlines and hospitality companies. Nevertheless, the central bank liquidity continues to flow into the bond market at a record rate. This liquidity flow from the central bank is what is keeping the spreads tight. As long as the Federal Reserve keeps on pumping more cash, credit spreads will remain tight. Because of this, investors cannot find assets with a good return. All in all, these are “interesting times” as the old Chinese curse goes. Going into February, my overriding concern was that the Federal Reserve, by purchasing $60 billion in Treasury bills per month, was lifting asset values across the board in the fourth quarter and into the first. This form of quantitative easing has caused what is called the ‘everything bubble’, because virtually every sector was up over the past year even if the economy is not doing that well.
It is now very clear that this bubble has begun bursting. The economy has already taken an unpredictable path and many indicators are showing that soon we might find ourselves in the middle of an economic collapse. We have already reached the tipping point and if no immediate action is taken, the stock market will continue plummeting. At the moment, the S&P 500 has already shed more than 3000 points and the 10 year treasury yield is at the lowest point.
The Federal Reserve is still pumping more billions into the markets. This strategy will only help in the short term but when you look at the long term picture, the economy is headed in the wrong direction. Recently, we have also seen the central bank making interventions in the repo markets to ensure that the market remains liquid. They have pumped more than $62.5 billion and much more cash will be pumped by the end of the year. This intervention signals that things are not stable in the financial system and the Federal Reserve is afraid that a liquidity problem can bring the whole financial system down in a day. This will indeed cause the biggest financial crisis in history.
The US has the highest debt amounts in the world and in the current financial year, the federal debt is over $1 trillion. Contrary to this, the government spending is still rising and the congress seems that they are not ready to reduce this spending. Maybe it is because we are in an election year and this will reduce Trump’s chances of re-election. For many years no one has been concerned by this and instead they have been proposing bigger federal budgets. This action by the government is just making the bubble in the American economy bigger every day and an economic collapse has just begun biting.
The stock market is now at record lows and all major stock indexes like S$P500, Dow and Nasdaq are dropping in value every day. In the process, billions of dollars are being lost. This might end up being a worse stock market collapse compared to what we had in 2008. Gloomy economic data is been released every single day and the industrial production data is dropping at an alarming rate. This signals a big economic slowdown. Economic numbers are too low such that the economists have been forced to lower their expectations on the GDP growth in the first quarter. It is very clear that the US economy has been steadily weakening but at the same time contrary to expectations, the stock market continued rising. This contrast is what points that the stock market is a bubble that has been sustained by continuous pumping of money by the Federal Reserve. Obvious this cannot continue forever and right now it seems that the bubble is already busting and the value of US stocks is dropping every single trading session. The mother of all stock market bubbles is already bursting!
Just a few months ago when the stock market was rising, Donald Trump took a lot of credit and saw this as a symbol of success for his presidency. Ironically, at the same time the real economy was slowing down and employment numbers were plummeting. Most people did not realize that the stock market was going up because of the stimulus from the Federal Reserve. They had initiated various policies like super low interest rates and quantitative easing. This was an artificial growth and now it appears that the Federal Reserve has ran out of tools to sustain the bloated economy. Right now, the reality is being revealed and everyone is realizing that we have a very big bubble that is bursting before our eyes. There is a lot of panic in Wall Street as the stock market closes lower every day. This is the first time investors have panicked like this since the 2008 financial crisis.
The Federal Reserve is desperately trying to cut the interest rates but this will not help. Last week the lowered the late by 0.5 percent and even with this, the market is still plummeting. What happened back in 2008 during Obama’s administration is again repeating itself. The stock market is now a big, fat ugly bubble. It will not be a surprise if we wake up one day to just realize that the stock market is down by 50 percent. Various initial public offerings (IPO’s) are also a big bubble- especially those related to cannabis companies. They will all pop up because the entire stock market has turned out to be a one big bubble. The US dollar is also another big bubble because it has lost a lot of its value because of unregulated orienting of new money. It is just a matter of time before it is replaced with gold. In our current system, nothing looks stable and soon we will find ourselves in the biggest economic depression in history.
Unfortunately, the government is filled with politicians who do not understand what is happening with the economy. They have already made bad decisions that have placed the economy on the path to a collapse. The government is to be blamed for what is happening in our stock markets and in the economy at large. The administration has abandoned effective economic models that were laid by our founding fathers to sustain the US economy for years. Instead they have adopted ‘quick fixes’ instead of imposing long term solutions that will save the economy. The current leadership has bent economic principles that have served the US economy for many years and I doubt that any of our leaders understands the harm they are bringing to the economy. Right now we have the highest amount of debt in history and our economy is already bloated. The collapse of the American economy has already begun and the current drop in the stock market is just a little glimpse of where we are headed to.
More downside is expected in the stock market and this might happen very quickly. In the past few months, everyone was worried because the market was extremely overbought yet we know that the stock prices cannot rise forever. The downturn has just begun and most economists are expecting this downtrend to continue. In the last 11 years, the market has been going higher and today most buyers in Wall Street have already shifted their bias and they are expecting a bear market for the foreseeable future.
Financial analysts are warning that we have a very big bubble that has already begun bursting. This time there will be no fixing even if the Federal Reserve attempts to cut interest rates. The biggest economic meltdown in history has already begun. Everyone remembers the 1929 stock market crash that triggered the great depression- often referred to as the worst economic meltdown in American history. Comparing this to what we have now, the great depression might look like a joke! A lot of wealth will be lost in the stock market because of this continued plummeting. No one knows, but economic indicators are signaling that a major stock market crash has already begun. The Federal Reserve has begun a series of interest rates cuts and recent 0.5 percent has not helped the markets in any way. It will not be a surprise if the lowered interest rates to zero as a way of reviving the dying economy but it will be too late. We have a very bloated economy and this is just the beginning of an economic collapse.