When Central Banks attempted to corner the sovereign bond market via ZIRP and QE, they forced ALL risk in the financial system to adjust lower.
Remember, in a fiat-based monetary system such as the one used by the world today, sovereign bonds NOT gold are the ultimate backstop for the financial system.
And for the US, which controls the reserve currency of the world, sovereign bonds, also called Treasuries, represent the “risk-free” rate of return for the entire world.
So when the Fed moved to corner this market, forcing the yields on these bonds to drop to all-time lows, it was effectively forcing ALL risk in the US financial system to adjust to an abnormal risk-profile.
Put simply, the Fed created a bubble in bonds, which in turn fueled a bubble in everything.
Yes, everything… corporate bonds, municipal bonds, stocks, even consumer credit. Indeed, nine years into this insanity things have reach such egregious levels of excess that even tertiary debt instruments such as margin debt have reached levels greater than ever before.
What is margin debt?
Margin debt is money that stock investors borrow in order to buy stocks. It is direct leverage. And it just hit a new record… or $561 billion.
To put this number into perspective, it is:
- Equal to the entire economy of Asian powerhouse Taiwan.
- Nearly greater than the amount of margin debt borrowed at the peak of the last bubble in 2007 50%.
- DOUBLE the amount of margin debt borrowed at the peak of the Tech Bubble.
Now, no one in their right mind would argue that late 2000 or late 2007 were periods of fiscal restraint.
Well, today investors are borrowing hundreds of billions or dollars MORE to invest in the stock market than they were at those times.
As I explained in my bestseller, The Everything Bubble: the Endgame For Central Bank Policy, the bubble in bonds is what finances this entire mess.
By creating a bubble in bonds, the US Federal Reserve has created a bubble in EVERYTHING because borrowing costs are at absurdly low levels.
This is why I coined the term The Everything Bubble in 2014. It’s also why I wrote a book on this issue as well as what’s coming down the pike: because when this bubble bursts (as all bubbles do) the policies Central Banks employ will make those from 2008-2015 look like a cakewalk.
We are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.
It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:
Chief Market Strategist
Phoenix Capital Research