Bubble Trouble: Stocks, Bonds, and Crypto

Bubble Trouble
Bubble trouble across multiple asset classes.

Alan Greenspan famously said back in 1996 that markets have expressed what he called “irrational exuberance”. This was during the dot com bubble when you had tech companies with little to no revenue being valued in the billions of dollars. Today we have the same story. We have crypto ICOs valued in the billions of dollars without having any real business model (let alone any actual revenue). And its not just crypto assets that have seen irrational exuberance, tech stocks are seeing it too. For example, Nvidia saw a 10-fold increase in stock price in two years simply due to its graphical connection to the cryptocurrency mining world.

Bond Market Doomed To Collapse

If we are working towards a major increase in long term interest rates, then this is obviously going to have a major impact on the structure of the economy. Inflation has been dormant for almost a decade now and has been largely unresponsive to loose monetary policy. This has kept interest rates at ultra low levels for the past nine years since the 2008 recession. If inflation suddenly rises (which it will), then it would trigger the Federal Reserve to push the federal funds rate past 1.5 percent and towards the 3 percent mark. Once that happens, yields will rise high enough to puncture the unwithered confidence in equities.

What is Behind The Bubble?

Nine years of loose economic policy. Nine years of purchasing government bonds and other securities by the federal reserve that have kept interest rates at an ultra low level for the last nine years. If you keep interest rates low enough, people will borrow money and pore it into assets like equities to gain a higher return than the cost of borrowing the money. But when interest rates rise, the cost of servicing the debt will outweigh the dismal returns offered by an already overpriced stock market.

Government Deficit Heading Towards WWII Levels

Can anyone explain why the current debt to gross domestic product ratio is at 103.81 % (as of Q3 2017)? During WWII, the United States held debt 120% of its gross domestic product. This is understandable considering that the entire world was at war during that time period. But today, the United States is not at war, so why has the country’s debt ballooned to such staggering levels?

Ads on Christmas trees, Yoga Classes for Federal Bureaucrats, a professional cricket league in Afghanistan and Golf Equipment in space are just some of the stupid things that the U.S. government spends money on, but these are not sufficient to explain the staggering amount of debt that the U.S. government continues to accumulate. The majority of the U.S. national debt is actually spent on Social Security, Unemployment & Labor and Military. While the first two can be adequately justified (albeit the amounts are questionable), the last one cannot be. The United States spends more on its military than the combination of the next top 8 nations in the world. This figure currently stands at $598 billion, the next country in line, China, spends about $171 billion annually on its military.

 

 

Khalid
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