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Where Is the Larger Bubble, in Stocks or Bonds?

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When these bubbles finally pop, the result is going to devastate financial markets.

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Furthermore, these same central banks are openly purchasing equities and allocating sizable portions of their balance sheets to stocks. Several central banks around the world have more than 10% of their reserves allocated to stocks at this point in time. The world is long risk and money is still flowing into bonds at the same time. Simply look at the recent price action in Treasuries for the past few weeks or note the strength in municipal bonds in aggregate since mid-March.

This brings me to my final point. For the past several years, bonds and stocks in the United States have rallied together. US Treasuries and domestic equities have been trending higher for more than three years as shown below. The S&P 500 is shown as the dotted line and the 30 Year Treasury Bond Price Index is the black solid line.



It is without question that both the S&P 500 Index and the 30 Year Treasury Bond have been trending higher for the past three years overall. Both underlying assets have produced strong gains during the same period of time. Now this brings me to my final question for readers to ponder. If both the S&P 500 Index and the 30 Year Treasury Bond can rally together, what happens if they sell off together?

The answer to that question is the real problem. Many sell-side analysts and economists ignore the bubble that the Federal Reserve has created in equity valuations. The bubble continues to be fueled by the monstrous liquidity injections that they have conducted beginning with the original quantitative easing. However, what is even less acknowledged by the sell-side is the massive artificial bullish valuations that have been created in the bond market.

Long-dated Treasuries are being purchased by the Federal Reserve to artificially hold down interest rates. This ongoing practice is causing a separate bubble to form in fixed income investments. So now we have a bubble in equities and long-dated Treasuries forming and the sell-side continues to trumpet that higher prices are likely. Ultimately the sell-side may be right in short to intermediate time frame, but the end game has a finality that few want to consider.

When these bubbles finally pop, as all excessively valued assets do, the result is going to devastate financial markets. It may be in six months or it may be in 10 years, but history will not be thwarted. The central banks can try to outsmart history, but they will ultimately fail.

Editor's Note: JW Jones offers more content at OptionsTradingSignals.com.

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No positions in stocks mentioned.
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