The next financial crisis will be a doozy. And on all on Bidans watch. It's going to be Biblical.
Waiting in line for the Roller Coaster.
Michael Burry, the hedge fund manager upon which the movie “The Big Short” is based has reduced his holdings from more than 20 stocks to just six. He is quoted as saying: “the stock market is on a knife’s edge”. He is also predicting “the mother of all crashes” due to more speculation than the 1920s, and more overvaluation than the 1990s.
Corporate debt has more than doubled from six trillion dollars to eleven and a half trillion, of which 35% is the worst of the worst junk grade and leading up to the last crisis the percentage was 15%. It is even worse in investment grade where 57% is in the lowest tier of BBB-rated, only one level above junk grade.
About one in four United States companies cannot afford to pay the interest on their debt, even in this low-rate environment. Corporate debt is at an all-time high at a time when credit quality is at an all-time low, hence the term corporate “zombies”, which have been de facto rescued by the Fed. Even so, trading in “zombie” companies is at record levels. Interest rate increases will likely trigger bankruptcy for many “zombie” companies, and credit downgrades for many other debt laden corporations.
Inflation will be exacerbated by too much liquidity. The M2 money supply has increase by 40% since the end of 2019, and 26% in just the last year, bubble numbers if there ever have been. Any option available to the Feb to stem the inflation trap would likely result in a recession.
The real ten-year treasury bond yield after inflation is currently below -5%.
The S&P-500 is selling at 3 times sales, and the Wilshire 5000 index is at two times GDP, record valuations!
In the Dot.com era the Nasdaq to S&P-500 volume was 1.3:1 and recently the ratio stood at 2.5, which is an indication of investor willingness to take risks.
And finally, but may be most concerning is Household Equity Allocation As A Percentage of Financial Assets, which has eclipsed the 2000 record high, which is a fat implied level of risks.
The normal range for the Rydex Leveraged Bull/Bear ratio 15 years ago was 1.5-2.0 to 1.0. Recently the ratio stood at 62:1 and rising. Additionally, there is record call buying on the option exchanges, and record call premiums, everyone is a bull. Trade volume in leveraged ETFs and Penny Stocks are at records.
Initial Public Offerings (IPOs) are at record dollar volume highs.
https://www.optimistcap.com/waiting-in-line-for-the-roller-coaster/