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Yesterday, U.S. stocks faced a small but extremely worrying decline – one that indicates that the current bull run can no longer be sustained and a crash seems closer than ever. The market slump is all over the news, and even big Wall Street institutions are flashing red alerts that the all-time high in stocks may not last for much longer and a significant correction is coming. Overvaluation has been worrying market veterans for months, but it has gotten to a point that a slight slip from record-highs could potentially bring the entire market down, which reflects how excess liquidity injected by the Federal Reserve via its Quantitative Easing program has created imbalances that simply can no longer be ignored. The Fed is now in a very tough position because rising inflation means that they have to start tapering bond purchases sooner than expected. But when billions upon billions of printed money stop flowing into the U.S. stock market, an epic collapse will follow. And the seven biggest Wall Street Banks are warning about growing risks in the market, with some of them expecting an imminent crash of up to 20%, while others expect the gradual burst of the stock market bubble.
It’s important to highlight that those big financial institutions tend to be very cautious with their warnings not to spook investors and accidentally spark a sell-off that could result in a crash. Of course, they also have to be very careful with their words since they have millions of clients pouring money into their investments and any wrong turns would be equally damaging for the institutions themselves. But this also means that when they finally begin to sound the alarm for a potential “correction” is because the situation doesn’t look good at all. With a booming consumer demand and several disruptions in global supply chains — including widespread shortages, labor shortages, delivery delays, low inventories of many consumer goods, and skyrocketing freight prices — inflation levels are looking very scary. In addition to all that, industry executives are stressing that problems in the supply chains are expected to last until 2022, while the UN just warned about a staggering increase in food prices that should also persist until 2022. This is to say that the Fed statements about a “transitory” period of inflation are about to be debunked. The economic rebound is at risk of being derailed by the fast growth of inflation, leaving the Fed no other option rather than initiate its tapering program.
At this point, unless the Fed unleashes another record burst of stock buybacks, which seems unlikely, the only thing holding the market together today is the continued risk appetite among retail investors. But these retail investors that are currently the support pillar that keeps the market stable will only stay in place for as long as easy money policies persist, according to JP Morgan. Data released by the bank found that the strength of the retail flow has pushed equities to near-record highs, pointing to an equity allocation of 46% now, only slightly below the post-Lehman crisis high of 47.6% seen in 2018.
All Wall Street banks know, and the Fed certainly knows too that even the smallest policy hiccup will trigger a furious response in Wall Street, because we already passed the point of no return, and the central bank cannot afford even the slightest drop in stocks without risking a full-blown meltdown and a stock market crash of epic proportions. While most central banks around the world have already started tapering, the Fed continues to postpone its chaotic fate. The European Central Bank announced yesterday that it will start tapering its asset purchases. The Bank of Japan, the Bank of Canada, the Bank of England, the Reserve Bank of New Zealand, and the Reserve Bank of Australia also announced tapering plans. Amid the most excessively overstimulated economy and markets ever, the Fed continues to $120 billion a month. What is taking the Fed so long to do the same as the other central banks? Well… because it knows that when it starts to roll back bond purchases and raise interest rates, it will inevitably spark a stock market crash, a housing bubble burst, and the collapse of the bond market. This is how the Everything Bubble bursts, and this explosion is going to happen sooner than most people dare to imagine.