Warning: The “Everything Bubble” Has Burst…
Thus far in our analysis of the bond market, we’ve focused on what bonds are predicting for the U.S. economy in the next six months.
For those of you with busy schedules, the most salient points regarding bonds were:
- The bond markets are larger and more sophisticated than the stock markets.
- Because of this, bonds are more sensitive to economic changes.
- Recently, bonds began to rise rapidly, pushing their yields to new lows.
- And because bond yields track economic growth closely, this move suggests the U.S. economy is beginning to contract.
Today, I want to put this recent downturn for bonds into perspective – particularly in terms of what it means for the next crisis…
The Single Most Important Bond on the Planet
Of all of the U.S. Treasury bonds out there, the single most important one is the 10-Year U.S. Treasury.
This is because a typical economic cycle (both the boom and the bust) lasts about 10 years. As such, the 10-Year U.S. Treasury is perhaps the best barometer for the U.S. economy in the bond market.
That’s why it’s crucial that we pay extra attention to what this bond is doing.
With that in mind, let’s look at the single most important financial development of the last 35 years, shown on the chart below.
The chart tracks the YIELD on the 10-Year U.S. Treasury.
As you can see, in early 2018 the yield on the 10-Year U.S. Treasury broke out of its long-term downtrend.
This breakout signaled to the world that the 40-year bull market in bonds was ending… which is a MASSIVE deal.
Let me explain.
As I outlined in my bestselling book The Everything Bubble: the Endgame For Central Bank Policy, U.S. Treasury bonds are the bedrock of our current financial system…
The yields on these bonds – particular that of the 10-Year U.S. Treasury – represent the “risk-free” rate of return. Or, the rate against which all risk assets (stocks, commodities, mortgages, gold, you name it) are priced.
So if bond yields rise – like we just saw on the chart above – bond prices fall.
What happens when bond prices fall?
The financial system comes under duress because debtors are forced to pay higher interest payments on their debt.
And if bond prices fall enough?
The Everything Bubble bursts.
THAT is what happened in 2018.
This is why the U.S. Central Bank (the Federal Reserve or “the Fed” for short) panicked late last year…
This is also why the Fed is currently talking about cutting interest rates – despite the U.S. economy growing at 3% and unemployment near record lows.
Put simply, the Fed is terrified that if it can’t “patch” over the burst Everything Bubble, the financial system will soon enter another crisis.
Now, I realize all of this sounds extreme. But the big picture for the stock market is saying the same thing…
A Bleak Outlook for Stocks in the Near Future
Take a look at the chart below.
The orange lines indicate bull market trend lines – times when the S&P 500 moved higher.
As you can see, in 2000 (right before the Tech Crash) and 2007 (right before the Great Financial Crisis) the S&P 500 broke the bull market trend lines and started to tumble.
And now, the S&P 500 has just broken through a third bull market trend line…
The question remains: Can the Fed fix this situation?
I can’t say for certain.
But what I DO know is that the Fed is acutely aware of what’s coming…
Over the next six months, I expect the Fed will begin introducing a number of new, extraordinary monetary policies – policies I predicted over two years ago in my book The Everything Bubble: the Endgame For Central Bank Policy – that will determine the fate of the stock market.
On that note, if you’re looking for investments to profit from the Fed’s future plans, I recently found two that could DOUBLE in the coming months.
Already they’re up 4% and 5% in just a few weeks. But I can’t reveal them here.
I’m writing a report on the opportunities and sending it to subscribers of my Strategic Impact newsletter in the next few weeks. I’ll let you know when it hits ― along with how to access it.
In the meantime, if you have any questions, comments, or feedback feel free to send them here.