Where Will The Money Go When All Three Market Bubbles Pop?

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

Since the stock, bond and real estate markets are all correlated, it's a question with no easy answer.

Everyone who's not paid to be in denial knows stocks, bonds and real estate are in bubbles of one sort or another. Real estate is either an echo bubble or a bubble that exceeds the previous bubble, depending on how attractive the market is to hot-money investors.

Here's a look at the inflation-adjusted S&P 500 (SPX) and margin debt: yep, a bubble.

With the Fed funds rate pinned to near-zero, bonds are in a bubble as well.

One of the consequences of eight years of central bank easing and intervention is that these asset classes are tightly correlated. Free money for financiers has sought a yield wherever it can find one, and the result is every asset class with a yield has become tightly correlated.

This moots the time-honored strategy of managing risk by shifting capital from an over-valued asset class into an under-valued asset class. When all the major asset classes are in bubbles, there is no "cheaper" asset class to shift capital into.

The only asset classes that are not in bubbles don't offer yields: precious metals and commodities are value plays or scarcity plays, but institutions that require a yield may not be able to shift much capital into these value/scarcity plays.

Hot money, however, can buy precious metals, oil futures, bitcoin, etc. The problem is the markets that capital will flee once the overlapping bubbles pop are worth tens of trillions of dollars each, and the markets that are not correlated to stocks/ bonds /real estate are an order of magnitude smaller.

Privately held gold at today's prices is worth around $3 to $4 trillion (if memory serves, all gold including the reserves held by nation-states is worth about $7.5 trillion at today's prices), which is a fraction of the global bond, stock and real estate markets.

The market cap of all bitcoins is around $10 billion, and of all Ethereum currency is $1 billion-- numbers so small they wouldn't even be visible in a pie chart of the hundreds of trillions of global financial wealth.

Where will the money fleeing deflating bubbles go? Since the stock, bond and real estate markets are all correlated, it's a question with no easy answer. What would $10 trillion seeking safe haven do to small asset classes such as precious metals, bitcoin, and tradable (liquid) sectors of the commodities markets?

If the bubbles in bonds, stocks and real estate all pop, what markets will be left that can absorb trillions of hot money sloshing around? the short answer is: none.

The chaos that will arise as trillions of dollars, yen, yuan and euros, etc. try to crowd through the fire exits as the asset bubbles pop will be monumental, and the spikes in small asset class prices as the hot money floods in will be equally monumental.

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nyse's picture

Actually a good question. If it truly is a zero sum game, its gotta go somewhere although given the fact it is literally created out of thin air maybe it just vanishes..

Neil Patrick Harris's picture

Trick question. The money doesn't exist in the first place. It's all smoke and mirrors on the derivatives/bond/stock markets. When the bubble pops everyone will converge on the USD sending it skyrocketting in a deflationary keyensian nightmare.

SomethingSomethingDarkSide's picture

Bonds, Bullion, and BitCoin - where else?  What would you do with $5mm?

Arnold's picture

I know I don't see the Big Picture, and would find it inconceivable if I did....

However...

I would find a no greater Irony in companies having to sell their over priced, over bought, buy back equities, to service the debt they used to buy them in the first place.

ATM's picture

It will go into EVERYTHING else as it races to find value. 

Boris Alatovkrap's picture

Present helicopter money from Fed and Central Bankster is 'float' in Bank-o-sphere™, in exotic derivative of derivative of derivative, 99% intangible soft asset where money is most easy to flow. But, when enough individual investor, banker, fund manager is make nervous, watch out as money is race to find value in hard asset. Will make 2008 financial crisis like walk in park.

… but what is Boris know!?

SafelyGraze's picture

there is no reason to expect stocks, bonds, and real estate to lose value

however, for those investors looking at other vehicles for enlarging their wealth, the best strategy is to pay for more young people to attend college.

that way all of society benefits, including those individuals who invest in the future this way.

also, paying for health care for immigrants serves a similar purpose. 

everybody benefits from a healthy, hard-working, well-educated society.

onward,
cloward piven 

 

Boris Alatovkrap's picture

Ah, so you are subscribe to theory of greater fool… there is always value because someone is come along, more foolish to buy from you.

Citxmech's picture

Hookers and Blow?

(Was this a trick question?)

Stanelli's picture

"What would you do with $5mm?"

Change it to 5,56mm? ;)

PlayMoney's picture

Lap dances. Lots and lots of lap dances.

robertsgt40's picture

Bonds and bitcoin are not exactly what I'd call a store of value.  If you don't hold it you don't own it.  Simple actually. 

marcuz's picture

You actually can hold bitcoin because you can be your own bank. No counterparty risk. This is precisely the point of bitcoin, having your private key in your posession.

 

valjoux7750's picture

You can also have a paper wallet for bitcoin and keep it in your safe or have a boating accident with it, assuming it's in  water tight storage. Anybody who invests should own btc!  don't hate cause you don't understand it..

ChemtrailPilot's picture

Exactly. If a market is overvalued by $1 trillion, and declines to fair value, then there's not an extra $1 trillion seeking a new home. It just means that that $1 trillion only ever existed on paper anyway, and now it's gone.

Should be obvious, but bears repeating: cash does not "come out of" or "go into" the stock/bond/RE markets. Every sale is also a purchase, and vice versa. The only thing that changes is what price each 2-way transaction occurs at.

bwh1214's picture

But the value of assets vs other assets will change, and this is important during this transition.  The only reason to care about the dollar value is if you have a lot of dollars.  It's gold vs real estate, silver vs equities, its bitcoin vs gold, its bullets vs. food/

The Saint's picture

Bingo, Neil.  Money can't come out of an asset unless other money goes in.  It's a simple fact.

There is one way money can come out of an asset and that is by putting it up as colateral for a loan.  Where do you think all this debt comes from?

 

 

Cluster_Frak's picture

I agree, but the follow up question is what then? If money goes in the USD, it is super risky to park it overnight in a bank account. USD must be invested in something liquid to mitigate the risk of bank going under. If you put $1,000,000,000 in the bank, you are only insured for $100,000 by the FDIC. How do you protect the rest?

chosen's picture

FDIC insurance is $250,000.  The first thing the govt did when Lehman failed was raise the FDIC insurance from $100,000 to $250,000.  It is pretty easy to get almost unlimited FDIC insurance by using different beneficiaries and different banks.  The problem is the FDIC would never have enough money to pay out if a number of major banks failed at about the same time.  That's why the big banks are "too big to fail".  In fact they can fail, but so would the FDIC, and then it is all over (back to guns and ammo).

Cluster_Frak's picture

Ok 250k then. To park $1,000,000,000 you would need 4000 accounts. Not feasible. Where else to park money? This is a serious question. i want to know where to park $1 billion when treasuries are in free fall.

chosen's picture

If you have a wife and children and beneficiaries, it is pretty easy to jack that $250,000 up to a couple of million in just one institution.  If you have a billion dollars, you would have accountants to find enough banks to put the money in.   Keep in mind, if everything is in free fall, the FDIC will not have anything close to enough money to cover their insured deposits.

Deathrips's picture

FDIC=Taxpayer

 

Youre welcome.

 

RIPS

Mustafa Kemal's picture

I think one should be careful assuming FDIC will do what you think during a  bailin.

Evidently, the FDIC will turn your deposit into shares.  If the question is how to keep a large amount of cash safe in a bank, I think the clear answer is that you cant. You need to get out of the banks and put it into something of real value. As to the difficulties of preserving $1B, that is a strangely annoying question. I would say the best thing you could do with it would be to give it away.

Not My Real Name's picture

Ah, yes ... FDIC "insurance." That's a good one! The FDIC has $25 billion in reserves backing $9 trillion in deposits.

 

jaxville's picture

  We saw how the real estate market was bailed out in 2008 by supporting the financials that were about to go under as a result of mortgage securitization.  The bond market has been supported by ever lower interest rates.  Soon stocks will be widely held by central banks lending support there.

  The correlation between real estate, bonds and stocks is that they are all being artificially supported.  The question to address is ; 'what asset class is not supported?'.  Gold has obviously been suppresed by the financial sector wizards for well over a couple of decades. 

  When gold is at $45,000 (or pick any arbitrary value that reflects a total loss of confidence in the financial sector and it's main product (debt)) we shall see how small that slice represents on a pie chart then.

OverTheHedge's picture

If only real-world assets have value, and all paper is bidless, then it would seem that the vast majority of "assets" have no saleable value, as they have no-one bidding for them. Quite what that does for valuations, I'm not sure - can't have reality causing embarrassing issues for the big boys. There may not be a crash at all - at least, not in the publicly announced sense of the word.

nibiru's picture

This is the end game scenario the hardest to execute. People on the streets rioting. Bankrupted banks with everyone running for their money - this is when the maestro comes in and channels all the money into his/her account.

 

We won't know it. No one will write an article about it. It will be there, another TPTB member being born from the ashes of the old world.

Mustafa Kemal's picture

"another TPTB member being born from the ashes of the old world."

Indeed

Mtnrunnr's picture

Poof.. Gone. Debt write offs canceling debt in the fractional banking make believe system. Once confidence is lost in money it becomes worthless. Gold and PMs will maintain/increase their RELATIVE value but all the 'numbers' will drop (in the likely deflationary spiral). Or everything skyrockets (in the case of a bail in/bail out when the Feds and CBs 'make' trillions to cover the creditor's losses (themselves). Hope for the first one.

Not My Real Name's picture

I can assure you that gold and (especially) silver will INCREASE their relative value (purchasing power) by a factor equal to the manipulation that the bankers have used to supress their price over the years.

Mtnrunnr's picture

I would assume so but they've established their manipulation knows no bounds/they might confiscate it. The crooks won't just go home when the meltdown starts, they will do everything in their power to maintain the power status quo. I own about 1/4 assets in PM so I'm acting under the assumption you're making too.

Stanley Lord's picture

Maybe a good question, but bad answers-oil futures? is he kidding?

trgfunds's picture

It goes to treasuries. Just like it always has. Just like it is today. Except during the next crash it will make yields negative.

East Indian's picture

Even though money is created out of thin air, once it is exchanged with another person for a good or service, it becomes real enough for that person. He can use it to acquire goods or services for himself. It wont vanish into thin air. It will be into the circulation forever. 

LadiesLoveCoolJames's picture

Right back into Beanie Babies and Pogs. I've been waiting for years now.

darteaus's picture

My Pokémon cards are moving up too!

2ndamendment's picture

It's pretty simple: real assets.  A.K.A. Gold, silver, platinum and palladium. 

GunnerySgtHartman's picture

Well stated, sir, and we are going to see a surge in PM prices which has not been seen in years (or maybe ever).

darteaus's picture

Not to quibble, but those are monies.

Assets: Food, fuel, medicine, liquor, ammunition, etc.

http://www.shtfplan.com/emergency-preparedness/a-survival-q-a-living-thr...

CHX's picture

To that end, I commited to buying my first ounce of Pt and Pd just the other day... There is NO fizzical stock to speak of for either, and global Pt production is like 10 times less than that of Au... Right now nobody seems to be interested in these 2 metals, so this is a purely speculative play, a small side bet, so to speak. But if but a few of the big guys will ever want to own some fizz Pt/Pd, then there is zero inventory to meet that demand... 

Justin Case's picture

It is true that these metal are cheap. The issue is what is traditional and familiar to people looking for a safe heaven. If you hold out a gold  or silver coin for a sale or trade they are well recognized by moar people than a platinum or palladium element.

This is hard enough with silver, imagine platinum.

https://www.youtube.com/watch?v=bYhTFz_SGw0

Mungo9000's picture

You're right... except about platinum.
A third of all the platinum mined ends up in car engines. As electric cars take over that demand will vanish whilst at the same time, the gasoline cars coming in for recycling will be giving back all of their scrap platinum. As the industrial use of platinum ends the world will be awash with the stuff. Keep stacking the gold and silver, slowly dispose of platinum on the spikes.

Justin Case's picture

I wouldn't be counting on the electric mobility soon to displace gasoline or diesel fuel. Gasoline engines in small cars will most likely be first deceased. Trucks like P/Us and luxury cars, sports cars, people with trailers and cottages away from the city will find it a burden to stop often and charge up. It's getting better but many years to go. Can't see an electric Harley being the show bike in Vagos Motorcycle Club.

Pee Wee Herman, definitely a yes.

reader2010's picture

There will be a new global currency based on IMF's SDR. Rinse and Repeat. You ain't seen nothin yet.

Budnacho's picture

While I appreciate Rickards faith in this theory...It all depends on confidence, and at that point, I don't forsee a wellspring of it to want to support another fiat system. I think the SDR concept will be still-born at best....

darteaus's picture

Agree - all the central bankers in the world can tout anything they want, but if the man on the street won't take it, then it won't circulate, and thus will not become "money".