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And that alarm bell can be found in the price action of Bitcoin, which recently tumbled over 40% is less than a week. I am fond of quoting the figure of total market capitalization as a percentage of GDP in order to illustrate the overvalued state of the equity market.
For the implosion within the cryptocurrency world foreshadows what will happen with the major averages as the Federal Reserve futilely attempts to stop monetizing the exploding mountain of U. That level has now surged to 145% of GDP; while history shows that stock values should represent just 50% of the underlying economy.
And one has to really wonder why bond yields haven’t started to soar as of yet. Not only this, the Fed’s balance sheet reduction rises to billion per month by October, the Fed’s dot plot predicts three more rate hikes this year and the ECB has halved its QE program and is predicted to be completely finished printing money by the end of this year.
The most important point I can make about this insanely overvalued stock market is that its lynchpin—that is, what’s holding the entire charade together--is the worldwide bubble in the bond market.
As long as interest rates behave, the rally can continue.
But then again, due to the delusion that the Fed can normalize interest rates, there have been five rate hikes on the shortest end of the curve since December of 2015.
This means the 3-Year Note once again has a yield that is higher than the S&P 500 dividend yield.
After all, the government does not suffer terrorists and tax evaders very well; and will never relinquish control over the money supply without a strong fight.