Real estate, bond, and stock markets are now in massive bubbles and all signs are pointing to a reckoning in all overly inflated assets. Homebuyers, investors, and the Federal Reserve have been fueling an unprecedented market mania, pouring more and more cash into overvalued investments. However, the frantic rally seems to be losing steam, and today we brought several evidences that indicate we’re about to see a simultaneous explosion of epic proportions.
The Everything Bubble is a phenomenon that resulted from the simultaneous expansion of the amount of money made available for federal agencies, and, of course, favorable conditions provided by record-low interest rates. But speculators are not considering that nothing lasts forever. Easy money won’t be delivered endlessly, interest rates won’t stay down forever.
Problems are emerging in all sectors of our debt-driven economy, and they were here long before this crazy euphoria began. That is to say, the current market frenzy and the extraordinary demand are the determinants behind bloated valuations – not real tangible earnings, but behaviorism.
Just take a look at the housing market. In a year span, home prices soared nearly 20%, with the median sale price of an existing home reaching $329,100. But in all four major regions of the country are seeing homes selling for even higher than the asking prices.
In the Northeast, listing prices are up 21.4% from the median national price, whereas the Midwest registered a 13.5% increase, the South, 15.9%, and West 16.8%. Homes that spent decades in the market without a single offer are being snatched up right away by buyers that want to take part in the bubble and see their assets grow in value. As inventory continuously shrinks and widespread shortages of construction materials, such as lumber and plywood, are adding to the cost of homes, it is clear that there’s a major asymmetry between supply and demand.
Adding low mortgage rates to the picture, we can clearly see that the housing bubble wasn’t formed because the housing market has grown. Properties simply cannot keep registering surging prices eternally, as some suggest. And given that the affordability crisis is already pushing people out of the market’s door, the home price bubble has to burst.
As for the bond market, the recent price action suggests the market is attempting to price-in much more economic activity than it can, creating mispricing risks, as it funds zombie companies to survive for longer, but disregards the prospects of delinquency. Bonds and yields are inversely proportional. So when bonds go down, yields go up. Up until now, the Fed has been maintaining “yield spreads” low in the entire credit spectrum to supposedly bail out the bond market, regardless of the threats of rising interest rates, inflation, and the latest CPI readings.
Once again, the problem here is balance. While 10-year yields have shot up some 240% from their lows at 0.5% in August of 2020, bonds have been collapsing to levels last seen in 2006. This yield-curve inversion reveals there are critical and structural problems with the bond market, which means it is losing its status as a safe bet and this is already causing investors to move away from bonds. The last time that happened, things did not end well.
In that sense, the bond market collapse will affect every existing bubble and trigger a domino effect of widespread failures. And that leads us to probably the greatest bubble of all – the stock market bubble. Even the New York Times recently published an article highlighting that the outstanding rally is being boosted mostly by boredom and stimulus checks, resulting in “bubbles across a wide variety of esoteric categories”.
“When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years. You can’t maintain this level of near-ecstasy. It can’t be done, because you’ve put in your last dollar. You are all in. What are you supposed to do beyond that point? You can’t borrow any more money. You can’t take any more risk. How do you keep that level of enthusiasm going indefinitely?” asked no one less than legendary investor Jeremy Grantham, adding that “the bull market’s over when the last bull puts in their last dollar. When those stimulus checks are gone, we could soon see a crash of historic proportions”.
When the everything bubble bursts, simultaneously collapsing all overvalued assets, the citizenry will be crushed by debt. The signs are everywhere. Getting rich quickly has engulfed the entire nation in a madness never seen before in human history. But effortless enrichment is a delusion. And all delusions end in tears.