Where Will All the Money Go When All Three Market Bubbles Pop?
Since the stock, bond and real estate markets are all correlated, it’s a question with no easy answer.
Everyone who’s not paid to be in denial knows stocks, bonds and real estate are in bubbles of one sort or another. Real estate is either an echo bubble or a bubble that exceeds the previous bubble, depending on how attractive the market is to hot-money investors.
Here’s a look at the inflation-adjusted S&P 500 (SPX) and margin debt: yep, a bubble.
With the Fed funds rate pinned to near-zero, bonds are in a bubble as well.
One of the consequences of eight years of central bank easing and intervention is that these asset classes are tightly correlated. Free money for financiers has sought a yield wherever it can find one, and the result is every asset class with a yield has become tightly correlated.
This moots the time-honored strategy of managing risk by shifting capital from an over-valued asset class into an under-valued asset class. When all the major asset classes are in bubbles, there is no “cheaper” asset class to shift capital into.
The only asset classes that are not in bubbles don’t offer yields: precious metals and commodities are value plays or scarcity plays, but institutions that require a yield may not be able to shift much capital into these value/scarcity plays.