The comments above & below is an edited and abridged synopsis of an article by Howard Kunstler
The blow-off in the stock markets is supposedly America’s consolation prize for what many regard as the bad acid trip of the Trump presidency. But it’s just another hallucination, and while the markets have roared up, reality is at work, namely in the dollar and bond markets.
A financial smash-up is the only thing that will break the spell. Treasury Secretary Mnuchin says the US has a weak dollar policy, just as his department is about to borrow $1.2 trillion to cover government operations in the year ahead. Who wants to buy sovereign bonds backed by a falling currency just as the Fed is preparing to dump an additional 600 billion dollars’ worth of bonds on the market?
When no one wants to buy bonds, interest rates have to go higher; the problem is that the Treasury has to pay the bond-holders more money, and the only thing that has allowed the Treasury to keep borrowing is near-zero interest rates. The Fed’s timid 25-basis-point rate hikes have not moved the needle far enough. But with the 10-year bond rate moving up towards 3%, something will give.
How long will the equity indexes levitate once the bond market implodes? What vaporizes with it is a lot of the collateral backing up the unprecedented margin (extra borrowed money) that this rickety financial tower of Babel is based on. A black hole is opening up, and it will suck the remaining value from the asset-stripped US into the vacuum of history.
Thus will begin the harsh era of commencing the salvage operation. There will be a few coherent thoughts such as, “Gee, you really can’t get something for nothing….”.