The Bubble of your life time – The Economic Meltdown of the Financial Markets
Most of the investors are still thinking that the 2008 crisis was the biggest crisis of their lifetimes. I am sorry but you are wrong.
The crisis or so-called Great Financial crisis in 2008 was just a stock and bank crisis. To put it down, it was not the “CRISIS”. The upcoming economic bubble or let’s call it the crisis no. 2 will be the biggest bubble in history of Financial Markets. The bond market is due to collapse and with it more than $100 trillion USD. Just to compare the Bubble in 1999 / 2000 the size was about $8 trillion USD. The Housing Bubble of 2008 was already a crisis valued about $14 trillion USD. The upcoming bond crisis and as well the derivatives bubble, especially here to mention the exposure of Deutsche Bank, is valued at least $100 trillion USD when not even $500 trillion USD. If somebody says it will not a big crisis, I am sorry it is exponentially larger than the entire bubbles we have seen before. The question is: How is this all possible? To start we need to understand how the current monetary system actually works. The MS (monetary system) is based on debt. The governments are issuing sovereign bonds which are selected by banks and institutions.
All these banks and institutions list the different bonds on their balance sheets and call them “assets”. What happen then is very simple: The Banks are issuing the bonds via the interbank markets as loans, credit cards and mortgages into the system. The “money” becomes part now of the economy but actually not as real capital, instead it is legal debt. The system is in 2016 so highly leveraged by the borrowed money and is due for the crash.
Why am I saying this?
If we consider the following, then it get clear: the actual cash in the US is about over $1.2 trillion USD and the “sitting” money in long-term and short-term accounts of the system is about $10 trillion USD. The USD bond market alone is roughly over $38-40 trillion USD, including the derivatives which are basec on the bonds, the USD system is valued about $190 USD trillion. We are talking here only about the USA. This size alone should give us a pause and should make us think about the future. However if we consider all global derivatives from Emerging Markets, Europe, Japan and the rest of the world we should come up somewhere in the area of $500 trillion USD. To compare the upcoming crisis with 2008, the CDS (Credit Default Swaps) market which killed the global economy was only a tenth of it ($50 – 60 trillion USD)
On top of this consider the significance of this bubble from a political view. For at least 30+ years the Governments in the Western Hemisphere have been securing the living standards by issuing debt. Debt simple creates opportunities for companies and individual investors. Debts were used to fund welfare schemes, pensions funds etc. We called it “temporary” issue. Our politicians have shown us that they like to spend money, especially overspending. So overspending is never a temporary situation. In the US alone around 50% of households receiving benefits from the Government. This are different kind of benefits and this is not only in the US. The entire spending process has been fueled by bonds.
There are centrals banks cutting interest rates, even into negative territory which we have never seen before, to make this debts possible. They need inflation or better, they want to have inflation up because it makes the debts more serviceable. The fear of deflation is the worst enemy of the Central banks as it would burst the bond market and would kill the entire system.
The question remains: How will this bubble of the bonds play out?
The first signs on the horizon are visible. The talk of the end of the US Dollar is a main topic on every party and meeting. For sure, one day the US Dollar will be not important anymore as we have seen with the GBP and the Dutch Guilder. But till this day, a lot of water is going down and the US Dollar will be “THE” reserve currency of the world. Almost every product in the world is priced in Dollars. The US Dollar is “THE” currency of the world and will be it for the next few years for sure. The US Dollar is the most liquid security in the world and the world borrows everything in US Dollar.
Between 1999 and 2014 the US Dollar was in a consolidation period but we can see the appreciation since. There is no surprise to understand that in this 15 years, the big asset bubble created, as borrowing was cheap. Let’s put it in simple words: the Dollar decreased and the bond markets globally increased. Everybody was buying the cheap money and invested it but it was June 2014 as the ECB with Mario Draghi cut the interest rates in the Eurozone. The music stopped suddenly and everyone who had borrowed US Dollar began to sweat. The invested money in Europe started to move back into the US because it was a simple carry trade, which ended. In just a few weeks roughly $10 trillion USD carry trade blow up. The US Dollar appreciated enormous and will go higher in the next months and years. The US Dollar rally crushed the emerging markets, especially Brazil, Russia, India and China (BRIC-States).
The meltdown in these country will get worse in the upcoming months as the carry trade will end finally. The borrowed money will return to the US and will appreciate the US Dollar. We will see 20+ years highs in the US Dollar index and see the target for a long term trade somewhere in the area of 125 – 130 USD. The bubble will implode and will return all the money into the US and will push the USD higher.
If this will be over I expect the US Dollar will be one the strongest currencies in the world again. The EURUSD should be below parity and will break the Eurozone apart, so we will introduce a new monetary system. The US Stock market will crash 50-60% from current levels and we will see on a global scale Banks, Governments and Corporations asking desperately for a “bail-in”.
How can you profit from the upcoming crash?
Simple buy the US Dollar Index because of the reason I have mentioned above. If you are a coin friend, think about to purchase some Gold and Silver Bullions. The coins will secure you access to exchange financial assets. Simple, the trust in a bank note or a standard 1 Euro coin will be zero. Gold and Silver coins are the solution in this moment.
Another must have investment is land. Soil and earth are extremely popular and needed for your daily food consumption. Learn to plant and harvest in your own little garden. We never know how hard the times will be. A hectare of land should give you enough space to secure your potato consumption. As Jim Rogers said once: “Brokers Going Broke, Farmers Will Become Rich, Very Rich!”
The final advice is to buy some quality stocks. With quality stocks I mean stocks which are necessary in everybody’s daily life: Nestle (Consumer Goods) , Coca Cola (Soda), Budweiser (Beverages), Johnson & Johnson (Consumer Goods) and Kraft Heinz (Consumer Goods). Maybe a health sector investment with Fresenius Medical care.
When will the crisis happen?
Let me make this clear. I do not have a crystal ball but what i know is that I do understand market cycles and history. All crisis are happen roughly between 7-10 years. The last global crisis was in 2008 and with the current environment we are very close to another one. My article should prepare you for the worst. The crisis can hit us next week, next quarter or just in 2 years. I don’t know but what I can say is that i will be prepared, so should you. If the next crisis will hit, you have only a small time window to act and to secure your future. Keep in mind, every downturn gives you an opportunity to benefit from it. The past repeats all over again and again. So will it happen the next time. Get your head and mind in the right direction and benefit from your trade of your lifetime. Enjoy the “Bubble of your life time” and be the winner.
Yours Marc Frommhold
Copyright by Marc Frommhold