The Greatest Bubble Ever: Why You Better Believe It, Part 11

The comments above & below is an edited and abridged synopsis of an article by David Stockman

As explained in Part 1 (above), the most dangerous place on the planet financially is now the Wall Street casino. In the months ahead, it will become ground zero of the greatest monetary/fiscal collision in recorded history.

For the first time ever, both the Fed and the US Treasury will be dumping massive amounts of public debt on the bond market late in the business cycle. That double whammy of government debt supply will generate a yield shock that will pull the props out from under equity and other risk asset markets, all of which have priced in ultra-low debt costs.

Stockman discusses the federal deficit soaring at the end of an aging business expansion; the Fed trying to recapture lost time via its commitment to balance sheet shrinkage; and quantitative tightening come hell or high water.

What is different about the greatest financial bubble ever is that there is no possibility of a quick policy-induced reflation after the coming crash. This time the cycle will be L-shaped with financial asset prices languishing on the post-crash bottom for years to come.

And that is a combustible condition. That is, 65% of US retirees already live hand-to-mouth on Social Security, Medicare and other government welfare benefits. But after the third financial bubble of this century crashes, tens of millions more will be driven close to that condition as their 401Ks again evaporate.

That’s why the fiscal game being played by the Republicans is so destructive. Now is the last time to address the entitlement monster, but they have thrown fiscal caution to the winds and borrowed upwards of $1.6 trillion (with interest) to enable US corporations to fund a new round of stock buybacks, dividend increases and M&A deals.

In the end, the laws of free markets and sound finance will out. The coming crash of the greatest bubble ever will prove that in spades.