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Big Banks warn about Stock Market and Housing Market time bomb

While the stock market is at all-time highs, the housing market is on fire. At MarketsTalk, we have been analyzing the issues behind current market conditions extensively throughout the last few months, as we believe that a large part of the stock market is extremely overvalued, because of a combination of excessive monetary stimulus and investor’s hysterically speculative behavior. May CPI data confirms that inflationary pressures are building up rapidly, with the official CPI showing a 5% annualized increase. However, the multiple methodological shifts in government reporting throughout the last 40 years have depressed reported inflation, generating a gap between real inflation and official CPI data in favor of policymakers and the government’s ability to devalue debt. If we look at the 1980-based official methodology for computing the CPI-U, we can see that current inflation in the US is at 13% annualized, a level similar to the 1980s. Even by using the 1990-based methodology, inflation is at over 8%, a number that is much more realistic than the current 5%. Also, businesses all around the US are reporting a labor shortage, as generous government stimulus is preventing the labor market from fully recovering while fueling inflationary pressures, since companies now must compete against government subsidies to hire workers. Despite this scenario, the Federal Reserve recently confirmed its “transitory” expectations on inflation and, therefore, interest rates, but some of the world’s largest financial institutions are starting to worry about a potential crisis.

[1981-2021 inflation calculated through the 1980-based methodology]

[2006-2021 inflation calculated through the 1990-based methodology]

Deutsche Bank warns of global ‘time bomb’ because of rising inflation

According to Deutsche Bank economists, in contrast with consensus from policymakers and Wall Street, current stimulus while dismissing inflation fears will eventually result in economic disruption, if not in the near term, then in 2023 and the years that follow. David Folkerts-Landau, Deutsche’s chief economist wrote: “The consequence of delay will be greater disruption of economic and financial activity than would otherwise be the case when the Fed does finally act. In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets”. In Deutsche’s view, furtherly stimulating the economy after 5 trillion dollars in pandemic-related stimulus (so far), the Fed’s balance sheet doubling from 4 to US$ 8 trillion and an economy that is expected to grow at about a 10% pace in the second quarter, would be a huge mistake. “Never before have we seen such coordinated expansionary fiscal and monetary policy. This will continue as output moves above potential…This is why this time is different for inflation” Folkers-Landau said. He also added: “Already, many sources of rising prices are filtering through into the US economy. Even if they are transitory on paper, they may feed into expectations just as they did in the 1970s. The risk then, is that even if they are only embedded for a few months, they may be difficult to contain, especially with stimulus so high”. High levels of uncontrolled inflation could then force central banks to sharply raise interest rates, causing “havoc in a debt-heavy world”. The Fed may be forced to lie by saying that inflation is “transitory” because after almost doubling the amount of money in active circulation in less than a year, the opposite would immediately cause inflation expectations, ultimately causing inflation.

[House price index, 1970-2021]

[Mentions of inflation YoY vs CPI YoY, 2003-2020]

The housing market is on fire

Because of historically low interest rates and a lack of supply, housing prices have increased dramatically in the last 12 years, with the median home price in the US hitting an all-time high of US$ 350 000 (In May 2021, according to Redfin, 74% of homes have been sold above asking price in Austin, Texas). The drastic increase in prices can be explained through multiple factors: inflationary pressures building up in commodities (especially lumber) are making building costs skyrocket, impacting an already supply short market that, according to, has added 5.92 million houses between 2012 and 2019, an insufficient amount to offset the 9.76 million households that have formed during the same period. Michael Hartnett, one of Bank of America’s top analysts, described current inflation as far from transitory, pointing out in his latest report that there are many indicators that show exactly the opposite of what the Fed is telling the public. However, inflation is not a problem for the US alone, it’s a global issue, as the dollar acts as the world’s reserve currency and many central banks around the world experimented with extremely loose monetary policies and extensive asset purchasing programs during the last 15 months. During an online seminar on inequality organized by the University of Glasgow, Bank of England Chief Economist Andy Haldane said that “As things stand, the housing market in the UK is on fire”, because of government incentives for buyers and a lack of homes for sale, causing a rise in prices that exceeded 10% for the 12 months to March, according to official data.

Dangerous levels of leverage in the Cryptocurrency markets

The crypto market has witnessed wild speculation last year, with the price of Bitcoin going up five-fold, crashing, and many other cryptocurrencies popping up like mushrooms even though they have no real-world applications, making their multi-billion-dollar valuations depend on more investors getting into the market and bidding up prices. The extreme volatility in those markets shows that these financial instruments cannot be considered a good store of value, nor a productive asset, but only a speculative instrument that plays a big part in the current casino aspect of the investment world. The total crypto market capitalization has reached a value of about US$ 2 trillion, which has led legendary investor Michael Burry (the man who predicted the 2008 financial crisis and made a fortune through put options) to warn about “the mother of all crashes”, with losses “the size of countries”, pointing at high leverage as the main problem. Also, an inflationary environment is more likely to push governments to regulate cryptocurrencies or even ban them, since more people moving towards these instruments would result in less effective monetary policies and an obstacle to central bank's digital currencies that are likely to be born in the coming years.

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