DEBT MARKET TIME BOMB

by Gregory Mannarino

Can you hear it? Tick, tick, tick....

In every sense, the debt market is a global disaster waiting to happen. When this mega-disaster hits, it will affect the entire world – not just the financial markets.

To understand where we are now, we need to look back to the financial crisis of 2008. What was the triggering event behind the ‘08 market crash?

It is always the same mechanism: a hyperinflated market trying to “determine fair value.” The “job” of these markets is to do that very thing.

How a market determines fair value is a simple concept: You have buyers and sellers who “set” the fair market price for an asset, be it a stock, bond, currency, commodity, etc. When this fair-value setting mechanism is influenced by, for example, a central bank artificially suppressing interest rates, major distortions in the price action process occur. When these distortions attempt to correct themselves, market crashes occur.

In 2008, when the Dow dropped from 12,000 to 6,000, the Federal Reserve began a “Quantitative Easing Program” of widespread asset purchases and direct capital injections into the market, all in what has been a very successful attempt to re-inflate a massive stock market bubble.

Virtually non-stop since they began (going on 12 years now), the Fed has been involved in this scheme of Quantitative Easing. Despite their claim they had stopped at one point, QE never ended.

Proof? The Federal Reserve has kept interest rates artificially low since ’08. In order to do this, the Fed must get into the market and make it happen. They cannot just “say” they are going to keep rates low – they must print cash out of thin air and buy debt, in this case bonds, to artificially suppress rates.

So, here we have a mechanism in which the Federal Reserve has influenced the “flow of capital” across the entire spectrum of asset classes, via artificially suppressing rates, for over a decade. This has caused cash to move into assets where it had no business going and out of assets where it should have been going – thus causing epic distortions in the market.

This scheme has inflated the mother of all bubbles in the debt market. This debt bubble has pushed the stock market into yet another massive bubble, and, also, it has re-inflated the housing bubble.

We know for certain, at some point, the markets in aggregate will correct these monumental distortions… it is not a question of if, but when. Understanding that the debt market is in fact the mother of all bubbles, and, at any given time, it will correct itself to fair value allows us to understand how this will play out.

Just as artificially suppressed rates have re-inflated the stock market and the housing bubble, when the debt market corrects, rates will spike rapidly,  putting intense pressure on the stock market and home values. A massive outflow of capital will occur from the debt market, causing rates to skyrocket, which, in turn, will cause a mass exodus out of stocks.

The bigger issue will be money velocity. When the colossal debt market sell-off begins, and it will, epic sums of cash and stocks quickly will bleed out.

All of this cash leaving these markets will not go to “money heaven.” Instead, it will move into alternate assets, such as gold, silver, Crude, and other commodities, and cryptocurrencies. Moreover, all of these “released” dollars will start chasing the same amount of goods. Henceforth, inflation, and possibly hyperinflation, will occur.

As I see it, holding onto physical gold and silver, as well as investing in cryptocurrencies, would be a way to hedge against the prospect of massive inflation.

 

7 Comments
  1. rick armbruster 1 month ago

    This is very Important for everyone to read. Unfortunately, factual reporting is overwhelmed with news stories with optics that sell ads. Since many do not understand this topic the writer has made this understandable without sacrificing the core message. Be forewarned and be forearmed. It is not a matter of whether another crash will happen it is a matter of when. Take a defensive stance.

  2. onlyme 1 month ago

    Great overview of what the FED has done to us. The level of debt is actually unimaginable to me and I suspect that when it blows up the poor will suffer the most as usual.

    Watching the straight down droops in both the gold and silver charts:
    https://www.kitco.com/charts/livegold.html and https://www.kitco.com/charts/livesilver.html
    only reinforces their desperation.
    I suspect that the powers to be will do just about anything imaginable and unimaginable to prevent this from blowing including the war Gerald keeps warning that is on the horizon.

  3. troy rhoads 1 month ago

    yeah,am believing greg when he says market is going up intill it doesn’t,so i am entering every thing long right now and just hope i see when it isn’t going up any more,getting some good heads up from greg helps out alot

  4. Craig Bradley 1 month ago

    THE BIG LURE

    Contrary to the conventional wisdom, gold is not a defense against inflation per se but instead, a hedge against a collapse in confidence in the markets and the government by a majority of Americans. Similarly, the Quantity of Money Theory is not the primary driver of inflation, rather inflation is but a symptom of a total loss of confidence on the part of consumers and investors. In a crisis, investors hoard cash. As the stock markets rebound and go on up further, more investors leave safe assets like Treasury Money Markets and to into risk assets such as stocks and real estate.

    Consumers and wage earners still remain shell-shocked from the 3-month long lock-downs and now riots and curfews are in no financial shape to be going-on shopping sprees. Instead, many are saving as much of their earnings as possible, if they have any, for a very uncertain future. Consumers are not going to be the marginal buyers they once were. Nope. Money velocity in the real economy is still at record lows (comatose) and likely to stay there for the next 5 years.

    The reason we had a Repo Market crisis beginning last Sept. is because the global debt markets had become increasingly concerned with bond duration and most importantly, growing credit risk. So, the market by itself was pushing-up short term rates (yields). The FED then started printing brrrrr and propping-up the Overnight Repo Market with $ 100’s of Billions a day. Now, the FED has dramatically tapered-down their monetary injections in the Repo Market to “only” $15 Billion a day. Currently, there is little demand for short term money at such low interest rates (near Zero) and instead, this money is migrating back to the Wall Street Casino, as it was prior to Feb this year. FED actions have worked for now. However, one day after investor confidence in the financial system is permanently lost, this monetization of debt will no longer work and the market will suddenly demand a large risk premium for low rated debt and sovereign debts alike. That is when the trouble really starts.

    “The Rich” will pay the ultimate price because many government bonds will default or miss interest payments, causing rating agency downgrades due to deteriorating economic conditions and declining tax revenues. In fact, this is already a work in-progress in many states. The U.S. Treasury may be forced to intervene to prop-up insolvent States and Cities, and buy Muni-Bonds.To date, the promise to buy low rated Corporate Debt (BBB) and Corporate Bond ETF’s has NOT occurred. The FED did not buy them.

    The Bond market is behaving as if they believe the FED “has their back” when buying BBB Corporate Paper. Maybe they do but maybe not. We will find out soon enough. Buying anything in this environment, unless you are an experienced and well informed trader, is probably risky business to say the least. Buyer beware. The Trend could shift or reverse at any time. Surely investors have at least learned that hard reality by now.

  5. ZEBB 1 month ago

    This time, jail the corrupt bankers, who should pay, for their evil illegal usury. This should be the only war on any person/s to pursue!

  6. david stoner 1 month ago

    All credit expansions end with the destruction of the currency involved.

  7. spwiet@mac.com 1 month ago

    IS this a decent time to buy a house? Home prices are fluctuating im my area – downwards – I do not want to buy a home that will have litle to no value in 10 years because of price coreections in the housing market…

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