When the next bubble pops

Many investors believe that the financial crisis of 2008 was the one. 

When the stock market crashed in 2008, investment banks were also hit hard. 

The gigantic Bond bubble, which presently stands at more than $100 trillion, is the greatest financial bubble in history. 

The Tech Bubble, by comparison, was projected to be worth roughly $15 trillion. The extent of the housing bubble that precipitated the 2008 financial crisis was estimated to be $30 trillion. 

The bond market is currently worth more than $100 trillion. The total is $555 trillion if you include derivatives that trade on bond prices. 

As a result, we’re dealing with a situation a million times larger. 

What caused this to happen? 

Debt is the cornerstone of the existing monetary system in today’s globe. There are a few major banks and financial institutions that control and buy/sell/control sovereign bonds issued by governments (for example, Primary Dealers in the United States). 

On their balance sheets, these financial institutions’ bonds are designated as “assets.” 

The sheer enormity of the bond bubble should be cause for concern. 

The total impact of the bond bubble is $555 TRILLION because these bonds are used as collateral for other securities (typically OTC derivatives). 

In comparison, the CDS market, which was valued $50-60 trillion and nearly brought the financial system down in 2008, was less than a tenth of this magnitude. 

In a nutshell, sovereign nations spent more money than they could collect in taxes, so they borrowed money to fund their many social programs. 

This was frequently portrayed as a “temporary problem.” Overspending is never a temporary issue, as politicians have often demonstrated. The political process is further aggravated by proposing numerous social expenditure programs/entitlements to win over people. 

Approximately half of all households in the United States get some type of government aid today. This type of social spending isn’t just a passing fancy; it’s widespread. 

The United States isn’t the only country affected… The vast majority of developed Western countries are now bankrupt due to excessive expenditure on social programs. This spending has also been totally funded through bond offerings. 

Why have central banks done all in their power to prevent sovereign bond defaults? When the bond bubble is understood, central banks’ activities since 2008 make sense. 

As a result, central banks have cut interest rates to make these massive loans more accessible. 

Central banks want/target inflation because it makes debts more serviceable and minimizes the danger of default, delaying the inevitable debt restructuring. 

Debt deflation is feared by central banks because it could cause the bond bubble to burst, bankrupting sovereign governments. 

As with all bubbles, this one will eventually burst. The first hint of disaster will be defaults and delinquencies in “at risk” sovereigns such as Greece and Spain. 

The great majority of debt markets, on the other hand, will be restructured or defaulted on at some point. There are just not enough assets to offer a safety net for too much debt/leverage. 

Once the bond bubble bursts, we’ll need a systemic reset. 

If and when the bond bubble bursts, the consequences will be catastrophic. 

You can use this strategy to keep your money safe. 

When a crisis strikes, the simplest thing you can do is move your money out of dangerous investments and into cash. 

The amount of cash in circulation will drop once the globe reaches a state of global deleveraging. 

As a result, the currency supply will be lowered when the bond bubble bursts and borrowers begin to default and restructure their debt. 

By Terry Grennon

Asset Allocation Strategist