Breakout

Easy Money Policy Will Lead to World’s Greatest Credit Collapse

Breakout

With home prices rising, consumer confidence at levels not seen since 2008, and record high stock prices, what's not to love about the economic comeback?

A lot, according to Steve Hochberg, the chief market analyst at Elliott Wave International, who says the warning signs are mounting that another, even worse, credit crisis is coming and a deep bear market will join it.

View gallery

.
"There's an age-old cycle that happens, where you have periods of easy money, and certain sectors of our economy gorge on the easy credit, and then invariably, when rates start to rise and the economy slows, whoever has been gorging on that easy credit gets into trouble, the economy falters and markets go down," Hochberg says in the attached video.

Of particular concern to him are emerging markets, sovereign debt, municipal bonds and student loans, the latter of which is increasingly in the spotlight as recent college graduates face huge debt and weak jobs prospects.

Related: Job Market Faces New Problem, Hitting One Unlucky Group Really Hard

"We have $1 trillion worth of student loans out there, and recent studies show that only about 40% of them are actually being paid right now," he warns. "We think this is a huge problem area because as students graduate, there aren't the jobs or the wages to sustain themselves to pay off these loans."

Add in defaults in Europe (Ireland, Greece, Portugal, Spain and Cyprus), record low yields on junk bonds and borrowing costs for emerging markets, and the stars are lining up for another huge crash. In fact, he says the "blastoff in bond yields" in the municipal market following Detroit's bankruptcy filing and Chicago's triple downgrade of its credit rating as proof that it's already starting here.

View gallery

.
"We've got a huge (public sector) pension problem in the United States," Hochberg says, referencing recent estimates of as much as a $3 trillion shortfall. He says closing that hole and ensuring that retirees get what they were promised - or at least most of it - will be incredibly deflationary for the states, cities and towns that have to divert money away from other services to foot the bill.

If he's right and we are indeed entering another flip in the credit cycle after five years on the mend, then the stock market will also be impacted.

"If you look at the world, U.S. stocks are really the only asset class making new highs right now," he points out. "We think (stocks) are the next one to go."

Given this gloomy outlook, unsurprisingly his advice to investors is to "just stay safe" or, if suitable, to speculate a bit on the downside.

"There's a great buying opportunity coming."

More from Breakout:

The Greatest Untold Story Stock in the Market

Small Caps vs. Large Caps: Which Is the Better Bet Now?

3 Reasons Elon Musk Will Change the World

View Comments (323)