July 12, 2018
The Everything Bubble Hits a New Record... Right As Bonds Begin to Drop
The Everything Bubble hit a new record in 1Q18… with total global Debt to GDP exceeding 318%.
All told, the world now has some $247 TRILLION in debt. As I explain in my bestselling book The Everything Bubble: The Endgame For Central Bank Policy, when the US abandoned the Gold Standard completely in 1971, it opened the door to a massive debt expansion.
Because from that point onwards, the US would be paying its debt solely in US dollars… dollars that the Fed could print at any time. What followed was truly parabolic debt growth, with total US debt growing exponentially relative to its GDP.
By the way, that chart is denominated in TRILLIONS of US Dollars.
By the time the mid-90s rolled around, the US financial system was so saturated with debt the Federal Reserve opted to start intentionally creating asset bubbles to stop debt deflation.
The late ‘90s was the Tech Bubble.
When that burst, the Fed opted to created a bubble in Housing… a more senior asset class.
As a result, in the mid-00s we had the Housing Bubble.
When that bubble burst, the Fed opted to create a bubble in US Treasuries… the MOST senior asset class in the entire system, representing the risk-free rate of return against which all risk is valued.
Put another way, the Fed opted to create a bubble in the bedrock of the financial system. By doing this, literally EVERYTHING went into bubble-mode, hence my coining the term The Everything Bubble back in 2014.
Which brings us to today.
Yields on Treasuries have broken their long-term 20-year trendline.
This is a MAJOR problem. The entire debt bubble requires interest rates to remain LOW in order for it to be maintained. If bond yields continue to rise, bond prices will collapse.
If bond prices collapse, the Everything Bubble bursts.
The Fed now has a choice… continue to support stocks or defend bonds… and unfortunately for stock investors, it’s going to have to choose bonds.
Put another way, I believe there is a significant chance the Fed will let the stock market collapse in order to drive capital BACK into the bond market to force bond yields down.
Yes, the Fed has screwed up with monetary policy. And it is doing so intentionally to try to sustain the Debt Bubble. Currently the downside target for the collapse is in the 2,300-2,450 range.
Copper Has Just Triggered a "Crash Warning" to Stocks
The markets are now screaming at the Fed that it needs to “back off.”
Copper is widely called “Dr. Copper” due to its close association with economic growth. With that in mind, take a look at the chart below.
First and foremost, we see that Copper entered a “growth” period in November 2016. From this point until recently 2017, Copper maintained in an uptrend.
That uptrend has now ended.
This is a MAJOR warning that Copper is sensing something is VERY wrong with global growth.
Let’s move on…
Secondly, we see that Copper actually began to flatline in October 2017… which incidentally is when the Fed launched its QT program. We also see that since the Fed started this program, Copper has struggled to move higher (red box). And once QT was increased to $30 billion per month in April 2018, Copper began to trend lower.
This suggests that the Fed’s QT program is in fact having a direct impact on global growth. That suspicion is confirmed by the fact that Copper has gone STRAIGHT DOWN since the Fed announced it would hike interest rates another FIVE times in the next 18 months while also increasing its QT program to $40 billion per month.
Since the Fed made that announcement, Copper has dropped 14% without so much as a bounce.
Put simply, Copper is SCREAMING, “the Fed screwed up.” Not only has it taken out its bull market trendline from November 2016, but it is now collapsing without even a meaningful bounce.
ALL of this can be 100% laid at the Fed’s feet. Copper is sending clear signals that global growth is slowing down… but the Fed has determined to actually ACCELERATE the pace of its QT program.
By the way, stocks tend to follow Copper. And based on this recent collapse in the metal, the S&P 500 could EASILY drop to 2,500.
Have a nice weekend!!!
Chief Market Strategist DHF.
George Town. Cayman Islands.