As I noted yesterday, the Fuse on the Global Debt Bomb has been lit. We are now officially in the Crisis to which the 2008 Meltdown was just the warm up.
The process will take time to unfold. The Tech Bubble, arguably the single biggest stock market bubble of all time, was both obvious to investors AND isolated to a single asset class: stocks. In spite of this, it took two years for stocks to finally bottom.
In contrast, the current Crisis that we are facing involves bonds… the bedrock of the financial system.
Every asset class in the world trades based on the pricing of bonds. So the fact that bonds are in a bubble (arguably the biggest bubble in financial history), means that EVERY asset class is in a bubble.
And what a bubble it is.
All told, globally there are $100 trillion in bonds in existence today.
A little over a third of this is in the US. About half comes from developed nations outside of the US. And finally, emerging markets make up the remaining 14%.
Over $100 trillion...the size of the bond bubble alone should be enough to give pause.
However, when you consider that these bonds are pledged as collateral for other securities (usually over-the-counter derivatives) the full impact of the bond bubble explodes higher to $555 TRILLION.
To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).
What does all of this mean?
The $100 trillion bond bubble will implode. As it does, the financial system will begin to deleverage as debt is defaulted on or restructured (reducing the amount of US Dollars in the system, pushing the US Dollar higher).
By the time it’s all over, I expect:
1) Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.
2) The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).
3) Japan to have defaulted and very likely enter hyperinflation.
4) US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.
5) Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.
This process has already begun in Europe. It will be spreading elsewhere in the months to come. Smart investors are preparing now BEFORE it hits so they are in a position to profit from it, instead of getting slaughtered
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