The Fed Pushes the Economy Into an ‘Everything Bubble’
The Federal Reserve’s seemingly endless printing of money during the pandemic created economic bubbles across various industries. These bubbles are now linked together. As a result, the global economy is now floating in an ‘everything bubble’. Unfortunately, all bubbles must burst, and the Fed just stuck a pin in it. Economists say we are watching the everything bubble explode right before our eyes. We face the largest potential markdown of perceived wealth in U.S. history.
You can see it happening in the market. U.S. stocks fell sharply Monday afternoon. Investors braced for another week of volatility amid a fresh report on inflation. The Dow Jones Industrial Average fell over 400 points. This is on the heels of stocks tanking Thursday. They posted the worst session since 2020. It tumbled over 1,059 points. Meanwhile, all 11 of the S&P’s largest sectors fell. 1
“Today in the U.S. we are in the fourth superbubble of the last hundred years,” wrote famed fund manager Jeremy Grantham. “Even more dangerously for all of us, the equity bubble, has now been joined by a bubble in housing and a bubble in commodities.”2
Signs of a Superbubble
A superbubble in an industry means that they have exceeded fundamental value by a large margin. A margin several times larger than a normal bubble. The equities superbubble is a result of the Fed offering virtually free money to investors. They inflated stocks to artificially high prices. Now the Fed has turned off the free money tap with record interest rates. They are also unwinding billions of dollars of assets they purchased during the pandemic. As a result, stocks are falling to their real value. Some investors are experiencing a shock as they are encountering a market that isn’t propped up by the Fed for the first time.
The economy is following the pattern of previous superbubbles before they exploded. Right before it happens, stock prices increase two to three times the average speed of the full bull market. In this cycle, the increase occurred in 2020 and ended in February 2021. During which time the NASDAQ rose 58% measured from the end of 2019.3
This is followed by a rash of crazy investor behavior. In the last two and a half years, there has been no shortage of this– more even than in 2000 – especially in meme stocks, in cryptocurrencies, and in NFTs.
Real estate is part of the ‘everything bubble’. We are participating in the broadest and most extreme global real estate bubble in history. Today houses in the U.S. are at the highest multiple of family income ever, after a record 20% gain last year. Ahead even of the disastrous housing bubble of 2006.
To make matters worse, commodities are also in a superbubble. We have broadly overpriced, or above trend, commodities. This includes oil and most of the important metals. In addition, the UN’s index of global food prices is around its all-time high. These high prices are important as they push inflation and stress real incomes.4
What Happens When the Bubble Bursts
Morgan Stanley predicted the risks of the ‘everything bubble’ last year. They stated, “It is well understood that the recent ‘everything bubble’—in which valuations for most major financial assets have reached historical extremes—is predicated on low real rates and the perception of their sustainability. Low real rates have also been viewed as an important driver of newly emergent trends. Including U.S. dollar weakness and a bullish outlook for commodities. Any interruption to this low real rates regime could threaten valuations. And thus represents a major risk to the current market environment.”5
Risk has become reality as the Fed has dramatically raised interest rates. These linked financial bubbles threaten the global economy. If the value of all these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the U.S. alone. Around the world, depressing stocks and real estate values will throw the USA and other economies into a global recession.
As the everything bubble comes exploding down around us, Jeremy Grantham advises putting your assets into safe havens. Among his first choice of safe havens is gold. If you want to protect your wealth, then contact AHG about opening a Gold IRA today.