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The Real "Pin" That Could Pop the Stock Bubble

Nothing goes up forever. Not the Federal Reserve's balance sheet, not global debt levels, and not stock markets… even when governments don't shut down.

Precisely because the Fed's balance sheet ballooned from $869 billion in August 2007 to over $3.6 trillion (and counting) today, and in spite of ballooning U.S. and global debt levels, U.S. equity benchmarks have been inflated to precarious heights.

"Houston, we have a bubble."

While the sky-high Fed balance sheet and rising global debt levels are their own bubbles, when they diverge – meaning, when the Fed starts to taper as global debt inflates – look out.

If the Fed-induced pump priming of financial assets isn't backstopped by strong and real global GDP growth, the increasing debt burden of the world's citizens will act as the ultimate pinprick that explodes the United States' inflated financial assets bubble… and other global bubbles.

So here's what's really happening, how to prepare for the eventual correction (or possible crash), and – more importantly – how to make money from it…

Up to 40% of Your Gains Aren't Real

The credit crisis that crescendoed in the autumn of 2008 was called a "credit crisis" because banks stopped lending overnight to each other, and short-term financing markets effectively shut down. There was no credit.

The Fed had to intervene and aggressively lubricate seized-up liquidity conduits, not just for banks, but for insurance companies, money markets, and corporations. And not just here in the United States. The Fed facilitated massive global liquidity vis-à-vis currency swaps and other dollar liquidity mechanisms.

Since the Fed's primary constituents are America's biggest too-big-to-fail banks, and because America's biggest banks are all interconnected (see "The Mother of All Bubbles") with banking behemoths across the globe, the correlation exposure faced by the world's biggest banks required a concerted effort to save them all.

The Fed, having the biggest capacity to expand its balance sheet (given the de-facto backing of the U.S. government and American taxpayers), took the lead, and central banks around the globe stimulated with gusto.

Because the credit crisis morphed into the Great Recession, the Fed, in the face of a dysfunctional and denuded American Congress, continued a zero-interest-rate policy (on overnight and short-term loans) to flush banks with cash in an articulated "wealth effect" policy aimed to pump up financial assets.

The wealth effect is a project to elevate devastated pension and retirement funds and invigorate consumer confidence by virtue of a rising stock market.

By pushing investors out of low-yielding fixed-income assets and into equity assets, the Fed engineered a rising stock market. Record-low interest rates further invigorated the stock market, as corporations have been able to borrow cheaply in the bond market to mainly execute stock buyback programs, lifting their own shares and the market to boot.

According to some estimates, as much as 40% of the rise in stocks over the past three years can be directly attributed to share buybacks funded by bond-market borrowing.

We have the Fed to thank for all that. But now we have the problem that markets, drunk with the Fed's Kool-Aid, are facing the prospect of the punchbowl being removed.

And it's a very big "problem."

Join the conversation. Click here to jump to comments…

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. yngso | October 1, 2013

    Mob rule has taken over… have heard 2 times that the Keystone XL may be part of the horse trading.

  2. richard f plant | October 1, 2013

    i agree

  3. Jeff Pluim | October 2, 2013

    Canada will have a balanced budget in 2014-2015 fiscal year. Canada's entire debt is slated to be PAID OFF in 2044. All of that will happen without raising taxes and with only very modest GDP growth. But there are several factors that can quickly accelerate that time to being totally debt free. Canada is a great place to be investing in now. And because Canada is right next door to the USA, it is only logical that droves of money will be heading out of the USA into the Great White North (as Canadians often refer to themselves).

  4. estephen B esteve | October 13, 2013

    good afternon,apologise regarding my Comment lastday miss understood what im talking about regarding the self employment thank you..

  5. Alan Steinbronn | October 14, 2013

    I strongly disagree with the worldview of most politicians and of most people. For some reason they all have it wrong. The RIGHT way to look at our world is to "follow the money". When you do that you clearly see America has created the world's prosperity. If not for the consumer habits of Americans EVERY emerging economy wouldn't exist. Not China, not Japan, Taiwan, S.Korea, you name it. Before them it was war-torn Europe. NONE would have 2 cents to rub together if those pennies weren't put there by Americans. By being a CONSUMER NATION we've created prosperity and wealth for all the new and eager PRODUCERS of the world. For every Producer there MUST be a Consumer. The more the consumer consumes the more currency is passed to the producer. This is KINDERGARTEN economics. Yet no one seems to understand that AMERICA and its self-created US DOLLAR dominate the entire world's productivity.

  6. H. Craig Bradley | October 16, 2013


    This latest Bull Market is said to have begun in Nov. 2011. That makes it about two years old, hardly long in the tooth at this point. So, despite misgivings about its "sustainability", interest rate direction, budgets, debt, consumer confidence, etc. it still has some more time. The average Bull Market lasts about 4 years. Sometimes more, sometime a bit less.

    We never know for sure, nor do we know how fast or how far down the next bear market will go either. So, timing things is always tricky. Right now we are running with the Bulls in Spain. Therefore, the best and easiest hedge is to avoid greed and simply don't go all-in, just in case.

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