Since Greenspan’s 1987 FED appointment, G7 central banks began signaling an interest rate policy that visibly favored using debt, instead of cash, to promote economic growth. A monetary policy that “achieved” a trinity of incompatible goals: 1. Persistently low prices & wage inflation at the suitable expense of 2. Promoting asset-price inflation, which in turn, spurred consumption, private investment, government spending, and thus: 3. GDP growth. This led us to a “debt trap,” as debt-to-GDP ratios must climb and rates drop for GDP to grow, making it vulnerable to higher interest rates (see top chart).
This debt-driven pyramidal GDP growth scheme took $20 trillion of G7 debt to $305 trillion from 1986 to 2022. As the rollover loop grew by 1,500%, real interest rates were cut by 1,000%, from +4% to -4%, while attempts to normalize them were always retracted, as soon as higher discount rates impaired GSIB loan books upon repricing the NPV of loan collateral, whose owners could not provide the difference vs registered value.
The G7 then chose to spiral its already unsustainable rate of monetary expansion, at orders of magnitude higher speeds by injecting ~$30 trillion of fiscal and monetary stimulus into the global economy from Q1-2020 to Q4-2021, while expressly interfering with the global production process. This sent CPI to rates not seen since 1974: over 7% and PPI to over 20%. Yet, once the Ukraine war began in 2022, the G7 simultaneously stopped QE, began normalizing interest rates, and weaponized the global reserve status of the dollar by freezing Russian central bank reserves. As energy obligations force net importers to innovate or face ruin, over $5 trillion of public debt buyers have switched out of US Treasuries and into hard assets, while countries like Russia, China, and Saudi Arabia actively seek to change the existing monetary order and Bitcoin raged upwards.
Hence, as we approach, yet another monetary collapse, no time in history has been better justified than now, to hedge for a peak-volatility event, as a valuation distortion that used to happen once every 100 years until the 20th century, has arisen thrice in less than 25 years: A Stock Market P/E ratio higher than 2 standard deviations (SD) over the historical mean. In fact, as extreme Stock Market P/E ratios are a measure of the price-distortion other credit-sensitive assets, such as bonds, real estate, or commodities, experience over the same period, the world may be in for a 1929 type of outcome, the only time the P/E ratio had ever reached over 2 SD over the historical mean, before Alan Greenspan came along, as you can confirm on the chart below.
Fortunately, this time, ordinary global citizens are less vulnerable than they were in 2008.
Though presently, we are the only human cohort that has ever witnessed the existence of a non-physical, non-systemic, unsubduable asset, the surrounding power structure keeps selling us the investment model whose constituents’ Market Correlation went to 1.0 in 2008. This happened, regardless of the seemingly differentiable nature between Bonds, Stocks, and Leveraged Real Estate, because their prices fully depend on the health of the monetary system sustaining them.
That means that most investors around us are still living in a Credit Time Bomb. A systemically correlated bubble, where all asset prices are 100% dependent on the availability of unrestricted credit from an excessively leveraged and overly exhausted monetary system.