The stock market is enjoying one of the strongest bull markets in its history, but the story is the opposite for the economy, where this recovery represents one of the weakest in U.S. history. And that spells bad news for investors. High-flying stock market valuations and corporate profits reverting back to more normal ranges, as covered in Part One and Part Two of “This Isn’t Going to End Well” aren’t the only reason for investors to fear an especially painful stock market decline. The particularly malignant and unsustainable nature of much of this cycle’s growth is another powerful reason to prepare for a big decline in stocks.
For the current secular bear market asset inflation trouble comes in threes. Too much liquidity in the global economy in the late 90’s fueled the Internet bubble of bad corporate investments that popped in 2000. To avoid the necessary restructuring pain around a recession, more liquidity was injected into the global economy leading to unsustainable growth around the residential real estate bubble that popped along with related credit markets in 2007. In another attempt to avoid restructuring pain and alleviate the following recession more liquidity is being injected into the global economy notably by the U.S. and Chinese governments. Today that capital is fueling more unsustainable price appreciation or levels in bonds, emerging markets and commodities.