“The Time Has Come to Leave the Dance Floor”

Justin Spittler


The easy money bubble is about to pop…

As you probably know, the Federal Reserve has been desperately trying to stimulate the economy since the 2008–2009 financial crisis.

It’s held its key interest rate near zero for the past eight years. And it’s “printed” more than $3.5 trillion out of thin air.

These radical policies were supposed to grow the economy. But all they’ve done is inflate financial asset prices.

The S&P 500 has soared 218% since 2009. A few weeks ago, it set an all-time high. Bond and commercial property prices have also soared to record highs.

At first glance, one might think the U.S. economy is doing well. After all, financial assets are supposed to follow the economy. But the U.S. economy is barely standing right now.

Since 2009, the U.S. economy has grown at just 2.1% per year. That makes the current “recovery” the slowest on record. And it’s only gotten worse this year. Through June, the U.S. economy grew at an annual rate of just 1.0%.

This clearly isn’t sustainable. Eventually, financial assets will have to come down to earth.

That’s why we’ve been encouraging readers to get out of the stock market. Now, many of the world’s smartest investors are saying the same thing.

• Tad Rivelle thinks the Fed is losing its grip on the markets…

Rivelle is one of the world’s most respected investors. He is the chief investment officer of TCW Group Inc., which manages more than $160 billion.

Last week, Rivelle published a chilling letter. He warned that the eight-year easy money bubble was about to burst:

While every asset price cycle is different, they all end the same way: in tears…

[S]uccessful, long-term investing is predicated on not just knowing where the happening parties are during the reflationary parts of the cycle but, even more importantly, knowing when the time has come to leave the dance floor. In our view, that time has already come.

• Like us, Rivelle says the Fed created this dangerous situation…

Rivelle wrote last week:

The Fed’s playbook on this is well worn: first, policy rates are lowered. This triggers a daisy-chain of events: low or zero rates promote a reach for yield; the reach for yield lowers capitalization rates across a variety of asset classes which, in turn, spurs a rise in asset prices.

Rising asset prices – the so-called wealth effect – “rescues” the economy by rebuilding balance sheets and restoring the animal spirits. And voila! Aggregate demand rises, businesses invest, and a virtuous growth process is launched.

Of course, the Fed’s easy money policies never “rescued” the economy. All they did was lift stock, bond, and commercial property prices.

• Rivelle says the Fed’s “stimulus” measures were doomed to fail…

According to Rivelle, economies grow when companies “make themselves more productive by delivering goods more efficiently or by innovating products valued by the marketplace.”

But that was never the Fed’s plan. Its goal has always been to get people to borrow and spend more.

According to Casey Research founder Doug Casey, these kind of policies don’t just fail… They actually destroy economies:

It’s part of the Keynesian view, in which spending and consumption drive the economy. This isn’t just wrong, it’s the exact opposite of what’s true. It’s production and saving that drive an economy.

You have to save to build capital, and capital is necessary for…everything. What these people are doing is destructive of civilization itself.

• U.S. financial assets have never been more out of touch with the “real” economy…

The chart below compares the value of financial assets (stocks, bonds, and real estate) with economic output (GDP).

Remember, financial assets and the economy should generally track together. When the value of financial assets greatly exceeds the value of the economy, it’s called a bubble.

You can see that the current bubble is far bigger than the one that triggered the 2008–2009 financial crisis.




• Rivelle says “we’ve lived this story before”…

As you may remember, housing prices skyrocketed in the early 2000s. Eventually, home prices became so disconnected from the real world that they crashed in 2007.

The collapse of the U.S. housing market nearly triggered a full-blown banking crisis. The S&P 500 plunged 57% in just two years…and the U.S. economy entered its worst economic downturn since the Great Depression.

Rivelle says we’re in a similar situation today. Unfortunately, the U.S. economy is even more fragile today than it was then.

According to research by The TCW Group, the amount of U.S. federal debt held by the public has jumped from 35% of GDP in September 2007 to 76% today.

Meanwhile, gross leverage, which measures how indebted U.S. companies are, is now 2.9 after peaking at 2.1 in 2007. (The higher the ratio, the more debt a company has.)

• All that debt comes at a steep price…

Rivelle warned last week:

[B]uying growth today with credit that needs to be repaid tomorrow is not a free lunch!

[…]Leverage goes up faster than the income available to service it. As such, the credit-fuelled expansion inevitably comes to a bad end. We’ve lived this story before: indeed, while every cycle is distinctly different, they all end up suffering from the same central banker induced maladies.

According to Rivelle, it’s only a matter of time before the average investor realizes “the central banking Emperors have no clothes.”

• If you haven’t already, we encourage you to take precautions today…

Start by taking a close look at your portfolio. Sell any expensive stocks. They tend to fall harder than cheap stocks during major selloffs.

You should also get rid of companies that will struggle to make money during long economic downturns. These include heavily indebted companies and businesses that need a “healthy consumer” to do well.

Taking chips off the table right now will help you avoid big losses if stocks crash like they did in 2007. It will also give you “ammo” to buy stocks when they get cheaper.

We also recommend you own physical gold. As we often say, gold is real money. Unlike paper currencies, its value isn’t tied to a central bank or government. That’s why gold has survived every financial crisis in history.

• Most people will wait until the government admits there’s a problem to take action…

They’ll wait until GDP turns negative. Or until there’s another bad jobs report.

Don’t be one of those people.

According to Rivelle, you’re making a big mistake if you’re waiting for the government to tell you there’s something wrong with the economy:

As obvious as this truth is to investors, when the sad end to the credit cycle comes, it always comes as a big surprise to many, including the central bankers who, reliant on their models, confidently tell you that no recession is (ever) in the forecast.

• Whether the government admits it or not, the economy is headed for serious trouble…

E.B. Tucker, editor of The Casey Report, thinks the next financial crisis is already underway.

According to E.B., a key warning sign is flashing in an “overlooked, little-understood market.” This same warning sign flashed before the savings and loan crisis of the 1980s…before the ’97 Asian financial crisis…and just before the 2000 tech crash.

Chart of the Day

Corporate debt levels are spiraling out of control.

Since 2010, U.S. corporations have borrowed almost $9 trillion in the bond market. That’s 50% more than U.S. corporations borrowed in the seven years leading up to the financial crisis.

This huge explosion in corporate debt wouldn’t be such a big problem if the economy was doing well. But that’s not the case. Remember, the U.S. economy is limping through its worst recovery on record.

You can see in today’s chart why this is so concerning. This chart shows how much debt non-financial corporations owe relative to GDP. The higher the ratio, the more outstanding corporate debt there is relative to the size of the economy.

You can see that this key ratio is now approaching a record high. The last three times corporate debt raced ahead of the economy like this, recessions followed.

Again, we encourage you to take steps to protect your wealth today. You can start by closing your weakest positions, holding more cash than usual, and owning physical gold.



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