Recently, I discussed the “Two Pins That Pop The Bubble,” specifically noting the risk of rising interest rates and inflation. However, the real threat is not just the stock market bubble’s deflation but rather blowing up the “everything bubble.”

During previous periods in financial history, the focus was primarily on the deflation of a singular market bubble. Such was a point we touched on in “Extraordinary Popular Delusions:” The two tables below show the history of bubbles and what they all had in common.

The flood of liquidity and ultra-accommodative monetary policies has simultaneously inflated multiple bubbles. Stocks, bonds, real estate, and speculative investments have all experienced historic inflations.

The byproduct of cheap debt and liquidity is the explosion of household net worth as a percentage of disposable personal income. Starting in the early 80s, as President Reagan deregulated the banking system, net worth exploded through massive leverage increases. Such was made possible by four decades of continually falling interest rates and inflation.

Another view is to look at the expansion of net worth relative to GDP growth. Of course, the massive deviation would not be possible without the massive increases in leverage over the last 40-years.

However, ironically, while it appears that Americans are far more wealthy, in reality, it is only a small fraction of the population that has benefitted. A point we made in “The Fed Made The Top 10% Richer.”

This framework is the basis for the rest of our discussion on the coming deflation of the “Everything Bubble.” 

The Stock Bubble

There is little argument that financial markets are currently in a “bubble.”  The monthly chart of the S&P 500 shows the deviation from long-term monthly means at levels not seen since 1990.