- Joined
- Jul 18, 2017
A few months ago, at the height of the GME craze, I made a thread where I essentially began to spaz out over the massive flows of money I saw heading into the crypto market and out of the US Dollar. At this time, I was only beginning to put my toe in the water of Crypto's, but since then I have pulled all of my money out of the Stock Market, leaving only my IRA and Mutual fund alone. I've also begun converting all my paychecks (after bills) into various Crypto's. Primarily BAT and Ethereum. The reason why I am doing this is because I see unprecedented systemic issues that don't just effect one part of the economy. They effect ALL parts of the economy. Including the value of the dollar bills in your pants pocket. I am writing this thread, partially to get my own thoughts on the matter straight, and too see if there is any kind of consensus with these ideas here or whether I am completely off base.
THE BOND MARKET
Lets just jump right into. The corporate and government Bond market. The yield on Government debt is now At its lowest point in over a century. You would have to go back to the 19th century in order to find yields this low. I find that this graph is the most illuminating.
At first glance you may think "well, this is a good thing, right?" If the yield is low, sure the bond holders won't make any money, but the governments borrowing ability is not as expensive as it could be. Which should be "good" considering how much it is borrowing. Right? No. We need to remember just how it is the government is "borrowing" this money. Its doing it in Fiat. Money the Federal Reserve is just printing and then handing out. Under normal market conditions. The yield acts as a braking mechanism on printing too much, as it essentially "destroys" extra and inefficient amounts of loose cash. Its the primary method by which the Federal Reserve historically prevented inflation. The money supply cannot inflate because the bond holders, of which the Fed is the largest one, get to take back a percentage of the money created and then loaned to the Government. But with rates so astronomically low this necessary guardrail has been blasted right on through. The money supply is increasing without check, aided by massive government borrowing. But what is the Government doing with that money?
Corporate Bonds.
By late 2020, US corporate debt had ballooned to 10.5 trillion, and has only increased since. Much of this debt was put into highly rated companies that qualified for issuing bonds at low yield. The issue here though is such rating were based upon pre corona market conditions. Disney was an A- company as an example, and they have hardly any revenue at the moment. Leading to a recent downgrade to BBB+, well on the way to junk status. But this did not stop Disney from taking out loans to the tune of 11 Billion dollars in March 2020, 5 Billion dollars in April 2020, and then ANOTHER 11 Billion in May of 2020. Absolutely bonkers. Even worse however, is even as Disney runs up the red ink and starts to crash its value, it borrowed all this money using its position pre corona virus. Meaning it did so by issuing investment grade bonds. Bonds with very low yields, matched closely to the yield on the US Treasury note which is trading at century level lows.
If you are an owner of some of this Disney debt, its probably making your hair curl. The return is at a record low not seen in a hundred years, but the risks are increasing at a massive rate. Rates not priced into the value of the Bond. What do you do? You sell it. The Disney debt gets securitized, and sold to someone else, probably a bank. You will take a hit at first as they will insist paying less then what the Bond is worth (they want a profit too), but this is okay as you now have hard cash that you can invest in STONKS which are doing really good right now. Plow all that shit into Tesla and you will make your initial loss on the Disney debt back in no time! Now, this may inflate Teslas stock a little but eh, its just one drop of water in the ocean.
But the problem is its not just YOU doing this. Because remember, corporate debt has ballooned to 10.5 TRILLION. All of the companies have been taking out massive debts to get them through the coronavirus pandemic. Oh, and one more thing. Who the fuck had the free cash to buy your Disney bonds off you in the first place. Probably a bank. And where did the bank get the money? The Federal Reserve gave it to them. And where did the Federal Reserve get that money? They created it. With pixie dust and rainbows. And why are the Banks going along with it when they know they will just sell off all that corporate debt as soon as they issue it? Easy. The government told them to do it, and is even turning around and buying some of the corporate debt itself. That is what much of the "stimulus" is.
This does two things. It keeps the Bond Yields stupid low. Since the money printer is insuring SOMEONE will issue and back the debt, there is no market pressure to increase yields until someone is convinced to take the risk on the company and issue it a loan. It also means that the value of these companies borrowing is decreasing in a way that is not backed by normal market conditions. With the end result that all that money printer money is ending up in the stock market all at once, rather then slowly moving for a 10-30 year period of time.
STOCK MARKET BUBBLE
With all this free money flowing from the Fed, through the Bond Market and into the Stock Market, we have created an unprecedented asset bubble. I am going to use Carnival Cruise Lines as an example of this because its just so perfect.
You can see on its 5 year trend line where the Rona began to really hurt. By April 3rd the stock had fallen to 8 dollars. And since then anyone who invested at the low on April 3rd have made 3x their investment. This growth and recovery was done over a period of time in which Carnival had hardly any operating revenue at all, and was racking up massive debts maintaining their fleet of beached white elephants. Oh yeah, and a few weeks ago, Carnival borrowed another 3.5 Billion Dollars to keep their fleet afloat. After a year of no money, massive debts, there stock is up 3x on their low and they managed to borrow over 3 billion dollars at a modest 5.75% rate. Investment grade rather then junk. Literally how?
You see this playing out all over the market. Stocks that should not be worth what they are, seemingly defying gravity and sitting at all time record highs. Just look at the S&P
What I find fascinating is the massive correlation between the track of the overall market, and Carnivals stock. Huge crash at the end of march, and then a dizzying return back up to the present day. When charts track so closely like that, you begin to suspect an underlying correlation, and I am probably preaching to the choir here, but that underlying thing almost certainly has to be a massive amount of free money flowing out of the Bond Market. I know everyone probably wants to point the finger at the Trump and Biden bucks, but those do not hold a candle to what is happening here. That is billions of dollars. This is TRILLIONS.
DISASTER
I think what we are facing here is a dreaded "Everything" bubble. Removal of regulatory safeguards and over financialization of the entire economy has integrated the Bond Market at every level. Something that has traditionally not happened before. Because the idea of selling debt you own is a very recent phenomena. It used to be if you issued a loan, you had to sit and wait for the person who you gave the loan too to pay you back before you could turn around and use your earnings. Now though you can loan money to Disney and then immediately turn around and sell that loan to someone else. Or securitize it and use it back other things you are doing. Even count it as an "asset" for when you want to borrow money yourself. It creates a vicious snowball rolling down the hill, and the Federal Reserve is miles and miles of pristine snow ready to feed it and make it bigger and bigger.
This means EVERY asset class is increasing in value completely unmoored to actual market conditions. Including the US Dollar itself. People have been wondering "where is the inflation", because all common sense indicates that all this free money should cause inflation. Well, the inflation is occurring. In the amount of Bonds. In the value of stocks. That is where the inflation is and it is absolutely eyewatering. And thanks to the financial Jiu Jitsu of the Fed, the US Dollar is covering it all. Which means that the value of the dollar has likewise increased to accommodate the new higher prices. Also completely unmoored to basic financial realities. I also question just how clear even the Fed is anymore on just where all the money actually is. I don't think they know. They CAN'T know. Who owns whose debts when debt can be sold, traded, securitized, and passed through any number of hands? This is what blew up the economy in 2008, and in that case it was just in the housing market. This time its ALL the Markets. Not just housing. All these banks are playing a game of hot potato with increasingly bad corporate and government debts, but the moment the music looks like its about to stop and one of the banks is holding the potato, the Federal Reserve swoops in, buys the potato, and restarts the music.
But this means there is a huge pile of potatoes accumulating, and I am very afraid of what this might mean. If this is an "Everything" bubble, even traditional safe havens like Gold and Silver won't be entirely safe. I would like to think Crypto Currency is safe, but I have serious questions there too when we consider the price of Bitcoin.
For all the claims that Crypto is unmoored from the traditional economy, its trend line in 2020 pretty much mirrored everything else. A Crash in late March 2020, and then a steady rise. Where it unmoored was at the start of 2021 when it suddenly began a meteoric rise. This coincided with a sudden stampede of institutional money into Crypto's. And my Storm Warning thread. This also means I fear even the Cryptos now have massive exposure to the Everything Bubble. Because if the music stops for good, this institutional money may very well try and sell off their Cryptos to try and stay afloat. And that means a massive crash in the value of BTC, and ETH. Long term, I think both will recover, especially if trust in the financial system is shattered. But the short term trend line will be an absolute fucking massacre. If the inflation of the US Dollar also starts to manifest in a big way at the same time, trying to convert to cash may not be ideal either. I've been trying to think of what might conceivably be safe in this scenario and nothing is really coming to me outside of Land, Canned Beans, a Gun, and plenty of ammunition.
CONCLUSION
Having thought this through now, I have concluded we are fucked. I just cannot say when we will notice how fucked we are. Japan has managed to juggle Quantitative Easing for decades now as a means to unwind a massive asset bubble. But this was aided by the fact that it was just one country. Now however the Asset bubble is global. Consider the ghost cities in China. There are no true safe havens in the developed world. Ironically this probably means investing in Companies in Africa may actually be the safest things right now as their capital and goods are located in countries with the least exposure to what is going on. Fruit plantations, gold and diamond mines and the like. Stuff with hard assets in countries that would actually benefit if the US Bond market imploded. Suddenly all their government debt denominated in US Petro dollars would be so much paper. Cryptos may also be safe, long term, but they like everything else are caught up in the Asset Bubble right now. Newer and undervalued Cryptos with actual utility like BAT may be better bets then Bitcoin as we head into whatever is about to happen. They will lose value too, but since they have not been as overly capitalized as BTC means they have far less distance to fall.
And who knows, maybe the Federal Reserve can figure out a way to unwind this ball of yarn. But I seriously doubt it.
THE BOND MARKET
Lets just jump right into. The corporate and government Bond market. The yield on Government debt is now At its lowest point in over a century. You would have to go back to the 19th century in order to find yields this low. I find that this graph is the most illuminating.
At first glance you may think "well, this is a good thing, right?" If the yield is low, sure the bond holders won't make any money, but the governments borrowing ability is not as expensive as it could be. Which should be "good" considering how much it is borrowing. Right? No. We need to remember just how it is the government is "borrowing" this money. Its doing it in Fiat. Money the Federal Reserve is just printing and then handing out. Under normal market conditions. The yield acts as a braking mechanism on printing too much, as it essentially "destroys" extra and inefficient amounts of loose cash. Its the primary method by which the Federal Reserve historically prevented inflation. The money supply cannot inflate because the bond holders, of which the Fed is the largest one, get to take back a percentage of the money created and then loaned to the Government. But with rates so astronomically low this necessary guardrail has been blasted right on through. The money supply is increasing without check, aided by massive government borrowing. But what is the Government doing with that money?
Corporate Bonds.
By late 2020, US corporate debt had ballooned to 10.5 trillion, and has only increased since. Much of this debt was put into highly rated companies that qualified for issuing bonds at low yield. The issue here though is such rating were based upon pre corona market conditions. Disney was an A- company as an example, and they have hardly any revenue at the moment. Leading to a recent downgrade to BBB+, well on the way to junk status. But this did not stop Disney from taking out loans to the tune of 11 Billion dollars in March 2020, 5 Billion dollars in April 2020, and then ANOTHER 11 Billion in May of 2020. Absolutely bonkers. Even worse however, is even as Disney runs up the red ink and starts to crash its value, it borrowed all this money using its position pre corona virus. Meaning it did so by issuing investment grade bonds. Bonds with very low yields, matched closely to the yield on the US Treasury note which is trading at century level lows.
If you are an owner of some of this Disney debt, its probably making your hair curl. The return is at a record low not seen in a hundred years, but the risks are increasing at a massive rate. Rates not priced into the value of the Bond. What do you do? You sell it. The Disney debt gets securitized, and sold to someone else, probably a bank. You will take a hit at first as they will insist paying less then what the Bond is worth (they want a profit too), but this is okay as you now have hard cash that you can invest in STONKS which are doing really good right now. Plow all that shit into Tesla and you will make your initial loss on the Disney debt back in no time! Now, this may inflate Teslas stock a little but eh, its just one drop of water in the ocean.
But the problem is its not just YOU doing this. Because remember, corporate debt has ballooned to 10.5 TRILLION. All of the companies have been taking out massive debts to get them through the coronavirus pandemic. Oh, and one more thing. Who the fuck had the free cash to buy your Disney bonds off you in the first place. Probably a bank. And where did the bank get the money? The Federal Reserve gave it to them. And where did the Federal Reserve get that money? They created it. With pixie dust and rainbows. And why are the Banks going along with it when they know they will just sell off all that corporate debt as soon as they issue it? Easy. The government told them to do it, and is even turning around and buying some of the corporate debt itself. That is what much of the "stimulus" is.
This does two things. It keeps the Bond Yields stupid low. Since the money printer is insuring SOMEONE will issue and back the debt, there is no market pressure to increase yields until someone is convinced to take the risk on the company and issue it a loan. It also means that the value of these companies borrowing is decreasing in a way that is not backed by normal market conditions. With the end result that all that money printer money is ending up in the stock market all at once, rather then slowly moving for a 10-30 year period of time.
STOCK MARKET BUBBLE
With all this free money flowing from the Fed, through the Bond Market and into the Stock Market, we have created an unprecedented asset bubble. I am going to use Carnival Cruise Lines as an example of this because its just so perfect.
You can see on its 5 year trend line where the Rona began to really hurt. By April 3rd the stock had fallen to 8 dollars. And since then anyone who invested at the low on April 3rd have made 3x their investment. This growth and recovery was done over a period of time in which Carnival had hardly any operating revenue at all, and was racking up massive debts maintaining their fleet of beached white elephants. Oh yeah, and a few weeks ago, Carnival borrowed another 3.5 Billion Dollars to keep their fleet afloat. After a year of no money, massive debts, there stock is up 3x on their low and they managed to borrow over 3 billion dollars at a modest 5.75% rate. Investment grade rather then junk. Literally how?
You see this playing out all over the market. Stocks that should not be worth what they are, seemingly defying gravity and sitting at all time record highs. Just look at the S&P
What I find fascinating is the massive correlation between the track of the overall market, and Carnivals stock. Huge crash at the end of march, and then a dizzying return back up to the present day. When charts track so closely like that, you begin to suspect an underlying correlation, and I am probably preaching to the choir here, but that underlying thing almost certainly has to be a massive amount of free money flowing out of the Bond Market. I know everyone probably wants to point the finger at the Trump and Biden bucks, but those do not hold a candle to what is happening here. That is billions of dollars. This is TRILLIONS.
DISASTER
I think what we are facing here is a dreaded "Everything" bubble. Removal of regulatory safeguards and over financialization of the entire economy has integrated the Bond Market at every level. Something that has traditionally not happened before. Because the idea of selling debt you own is a very recent phenomena. It used to be if you issued a loan, you had to sit and wait for the person who you gave the loan too to pay you back before you could turn around and use your earnings. Now though you can loan money to Disney and then immediately turn around and sell that loan to someone else. Or securitize it and use it back other things you are doing. Even count it as an "asset" for when you want to borrow money yourself. It creates a vicious snowball rolling down the hill, and the Federal Reserve is miles and miles of pristine snow ready to feed it and make it bigger and bigger.
This means EVERY asset class is increasing in value completely unmoored to actual market conditions. Including the US Dollar itself. People have been wondering "where is the inflation", because all common sense indicates that all this free money should cause inflation. Well, the inflation is occurring. In the amount of Bonds. In the value of stocks. That is where the inflation is and it is absolutely eyewatering. And thanks to the financial Jiu Jitsu of the Fed, the US Dollar is covering it all. Which means that the value of the dollar has likewise increased to accommodate the new higher prices. Also completely unmoored to basic financial realities. I also question just how clear even the Fed is anymore on just where all the money actually is. I don't think they know. They CAN'T know. Who owns whose debts when debt can be sold, traded, securitized, and passed through any number of hands? This is what blew up the economy in 2008, and in that case it was just in the housing market. This time its ALL the Markets. Not just housing. All these banks are playing a game of hot potato with increasingly bad corporate and government debts, but the moment the music looks like its about to stop and one of the banks is holding the potato, the Federal Reserve swoops in, buys the potato, and restarts the music.
But this means there is a huge pile of potatoes accumulating, and I am very afraid of what this might mean. If this is an "Everything" bubble, even traditional safe havens like Gold and Silver won't be entirely safe. I would like to think Crypto Currency is safe, but I have serious questions there too when we consider the price of Bitcoin.
For all the claims that Crypto is unmoored from the traditional economy, its trend line in 2020 pretty much mirrored everything else. A Crash in late March 2020, and then a steady rise. Where it unmoored was at the start of 2021 when it suddenly began a meteoric rise. This coincided with a sudden stampede of institutional money into Crypto's. And my Storm Warning thread. This also means I fear even the Cryptos now have massive exposure to the Everything Bubble. Because if the music stops for good, this institutional money may very well try and sell off their Cryptos to try and stay afloat. And that means a massive crash in the value of BTC, and ETH. Long term, I think both will recover, especially if trust in the financial system is shattered. But the short term trend line will be an absolute fucking massacre. If the inflation of the US Dollar also starts to manifest in a big way at the same time, trying to convert to cash may not be ideal either. I've been trying to think of what might conceivably be safe in this scenario and nothing is really coming to me outside of Land, Canned Beans, a Gun, and plenty of ammunition.
CONCLUSION
Having thought this through now, I have concluded we are fucked. I just cannot say when we will notice how fucked we are. Japan has managed to juggle Quantitative Easing for decades now as a means to unwind a massive asset bubble. But this was aided by the fact that it was just one country. Now however the Asset bubble is global. Consider the ghost cities in China. There are no true safe havens in the developed world. Ironically this probably means investing in Companies in Africa may actually be the safest things right now as their capital and goods are located in countries with the least exposure to what is going on. Fruit plantations, gold and diamond mines and the like. Stuff with hard assets in countries that would actually benefit if the US Bond market imploded. Suddenly all their government debt denominated in US Petro dollars would be so much paper. Cryptos may also be safe, long term, but they like everything else are caught up in the Asset Bubble right now. Newer and undervalued Cryptos with actual utility like BAT may be better bets then Bitcoin as we head into whatever is about to happen. They will lose value too, but since they have not been as overly capitalized as BTC means they have far less distance to fall.
And who knows, maybe the Federal Reserve can figure out a way to unwind this ball of yarn. But I seriously doubt it.
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