In 2022, the economy may face a recession, and the US stock market is on the verge of collapse!?

I personally believe that there may be a market crash in 2022.

Here, 'the market' refers to the stock market and the corporate bond market that far exceeds the size of the stock market.

I am not the only one who thinks this way. Michael Burry is one of the few who could foresee the financial crisis of 2008. In 2007, he bet heavily on the market downturn by buying credit default swaps on mortgage-backed securities through his hedge fund.

This trade made 0.75 billion dollars for Burry's investors, and he himself made 0.1 billion dollars. Michael Lewis wrote a book about him, which was later adapted into the movie 'The Big Short'.

We should all pay attention to this person, Burry.

He doesn't often share his thoughts, but when he does, it's usually on Twitter.

Burry is now predicting the 'mother of all crashes' is coming, stating that the current market is dancing on the edge of a knife. Recently, he posted a message about the market on Twitter:

More speculative than the 1920s, higher valuations than the 1990s, and more geopolitical and economic conflicts than the 1970s.

In addition to posting on Twitter, Burry is also selling most of his stocks.

At his hedge fund Scion Asset Management, he reduced the portfolio from over 20 stocks to 6 by the end of the third quarter.

Not all colleagues agree with my predictions, but it's okay, after all, no one can foresee the future.

But I think you should consider the opinions of various analysts and then make your own decisions.

2. The company's debt is extremely high, credit quality is very low, and there is a bubble in the bond market.

That being said, it is difficult to say that there is no bubble in the US stock and bond markets currently.

The stock market (represented by the S&P 500 Index) has risen by over 200% since before the 2009 financial crisis. Before the selling last week, the US stock market was hitting new highs almost every week. It is now up about 40% from before the COVID-19 pandemic, with a rise of around 25% this year.

Meanwhile, corporate debt has nearly doubled from around $6 trillion before the last financial crisis to approximately $11.5 trillion, which is almost an immeasurable figure.

The most frightening aspect of this debt is not its huge size but rather its poor quality.

Corporate debt, like consumer debt, can be divided into two main categories:

- Consumer debt can be classified into priority debt and subordinated debt, with subordinated borrowers having lower credit ratings and higher credit risks.

- Corporate debt can be divided into investment-grade and non-investment-grade (or 'junk') debt. Investment-grade borrowers are like priority borrowers, while non-investment-grade borrowers are like subprime consumer loan borrowers.

If junk bonds are split in half according to credit ratings, the lower-rated half (the worst half) represents 35% of all junk bonds currently. Before the last financial crisis, this proportion was only around 15%.

The situation with investment-grade bonds is even worse.

Over half (57%) of investment-grade debt is rated the lowest BBB level, with the proportion of BBB debt hitting a new high.

This means that this portion of debt is only one notch away from becoming junk bonds. When these debts are downgraded to junk bond levels, prices usually plummet, leading to a collapse.

Don't forget, this is happening at near historically low interest rates, with the company's credit ratings still so low, making debt costs not as high as in high interest rate periods. Companies pay less than 2% interest on investment-grade debt, while most companies pay less than 5% interest on junk bonds.

Nevertheless, about a quarter of American companies can barely pay their debt interest, known as "zombie companies".

Simply put, corporate debt is at record highs, while credit quality is at record lows. This is a bubble.

The U.S. Federal Reserve is running out of ammunition, and the bond market bubble may burst in 2022.

If the Fed had not injected trillions of dollars in stimulus funds into the American financial system (including the first-ever purchase of corporate bonds), the bubble might have burst last year.

The Fed actually threw a lifeline to junk-rated companies, and over the past two years, these companies have borrowed record amounts using the Fed's lifeline.

Even zombie companies are surprised at how easy it is to borrow money, as David Bernstein, the Chief Financial Officer of Carnival Cruise Line (CCL), said in an interview with The Wall Street Journal: I successfully raised $6.5 billion and was shocked by the result.

The unprecedented actions of the Federal Reserve simply further inflate the bubble, but like all bubbles, you cannot keep them expanding forever.

Identifying a bubble is one thing, but predicting when it will burst is much more difficult.

But I believe the bubble will eventually burst in 2022 because the Federal Reserve has run out of ammunition.

From different perspectives, the high inflation in the United States may continue.

I pointed out earlier this year that inflation is the biggest threat to today's market.

At that time, the inflation rate had risen to 1.6%, and Federal Reserve Chairman Jerome Powell referred to it as "transitory".

I have never believed why inflation would continue to worsen, why it may remain at a high level (far above the Federal Reserve's 2% inflation target).

The latest inflation rate in November is 6.8%, the highest level in 40 years. Powell finally admitted that the Federal Reserve should retract the word 'temporary'.

He now says that high inflation should continue until mid-2022.

I don't know how you will view this issue, but I will no longer focus on Powell's comments on inflation, he is completely untrustworthy.

I believe the inflation rate will be higher, high inflation will continue. The reasons have nothing to do with consumer supply bottlenecks, despite everyone saying it is the reason.

You can check the US M2 money supply, which includes cash, checking accounts, savings accounts, and money market mutual funds.

Since the outbreak of the epidemic, the M2 money supply has grown significantly:

Since the end of 2019, the M2 money supply has increased by $6 trillion, an increase of nearly 40%. By comparison, since 2000, the M2 money supply has grown by an average of about 6% per year. Last year it grew by 26%, and in the first three quarters of this year, it has grown by 9%.

When the money supply grows by 40% in such a short period of time, prices will also rise accordingly, which is a simple supply and demand relationship.

The recently passed $1 trillion infrastructure bill will only add more new funds to the financial system.

This is why I believe inflation will persist. In the following months, the inflation rate will eventually stabilize at below 5%. However, in the foreseeable future, the inflation rate will still be well above the Fed's 2% target.

5. No matter what measures the Fed takes to address inflation, it will burst the credit bubble.

The Fed has two methods to address inflation: reduce the money supply or raise interest rates.

Any of these methods will burst the credit bubble.

Do not expect the Fed to plan to reduce the money supply in the short term, the only way it can do this is by selling U.S. Treasury bonds (there is currently no such proposal from the Fed), or by asking banks to tighten credit.

Both of these methods will lead to rising interest rates and credit tightening, more than enough to burst the credit bubble.

As everyone knows, the Federal Reserve is planning to combat inflation by gradually raising interest rates, emphasizing that it is doing so slowly, using two methods to achieve this.

The Federal Reserve is indirectly achieving this by reducing (or what it calls "tapering") the purchase of government bonds. The Fed started tapering purchases by $15 billion in November last year, and now the reduction has been expanded to $30 billion. Since the beginning of the pandemic, the Fed has been buying around $80-100 billion worth of U.S. government bonds per month, accounting for 60%-80% of the total purchases.

Without the artificial demand intervention of the Federal Reserve, bond prices would undoubtedly fall. After bond prices fall, interest rates will rise, including rates for 5-year, 10-year, and 30-year periods.

The Federal Reserve also directly increases rates by raising a rate it controls - the federal funds rate, which is the short-term overnight lending rate that banks charge other banks.

The Federal Reserve recently stated that it will raise interest rates three times next year and three more times in 2023. The planned rate hikes are very modest, with only a 1.5 percentage point increase by the end of 2023.

The Federal Reserve must act slowly, knowing that it cannot raise rates too quickly, otherwise it will turn recovery into recession.

However, at that rate, the Federal Reserve will need several years to raise rates enough to catch up with the level of inflation.

You can see this from the "real" interest rates, considering the current inflation factors, the yield of the 10-year U.S. government bond is -5.4%.

But the persistent high inflation will not slow down the american financial. If the Fed really wants to combat inflation, it must accelerate. In other words, interest rates are about to rise significantly.

The increase in csi enterprise bond index rates will have a chain reaction on the entire economy, causing other rates to rise, including mortgage rates, corporate bond rates, etc.

With the rise in rates, hundreds of companies may go bankrupt, and they will try to refinance their debts coming due. Crediting will suddenly collapse, potentially triggering the largest bankruptcy wave we have ever seen and causing the credit market to collapse.

I'm not saying that every zombie company will go bankrupt. Some zombie companies still have a lot of cash, and some companies are growing rapidly with increasing profits. But many zombies will go bankrupt.

Here are the top 10 zombie companies that may apply for bankruptcy as rates rise. You wouldn't want to include these companies in your investment portfolio as they are currently unable to pay off debts and will struggle to refinance debts coming due in the next few years.

From the above chart, it can be seen that many companies on the brink of bankruptcy are in industries most severely affected by the pandemic, including aviation, cruise, and cinema industries.

But even before the outbreak of the pandemic, these companies were already heavily indebted. The pandemic only made their situation worse. I recommend avoiding these companies at all costs.

High interest rates will lead the economy into a recession, stimulating the rise of consumer credit.

I know you might think this: If the economy starts to slide into recession, the Fed might hit the brakes. The Fed might slow down the pace of tapering its bond purchases, and might once again start buying US Treasury bonds to keep rates low during market panics.

Indeed, economist Nouriel Roubini agrees with this. Roubini is a professor at New York University's Stern School of Business. Like Michael Burry, he also predicted the 2008 financial crisis. Roubini believes the Fed will back off.

As he stated in his interview with Bloomberg:

The Fed will delay completing the tapering or rate hike process.

But as I mentioned earlier, the Fed is out of ammunition. If it does indeed back off, it means a greater stimulus effort and higher inflation.

Consumers will only endure higher prices in the long term.

Persistent inflation is putting pressure on the poor and middle class, with food, clothing, and energy costs accounting for a larger proportion of their budget.

Many households are increasing credit card debt to pay their bills. Consumer credit declined for most of 2020 as people used the Fed's stimulus spending to repay debts. However, as bank account balances dwindle, consumer credit is on the rise again.

High inflation reduces disposable income, leading to a slowdown in overall economic growth and an increase in debt.

As Michael Burry pointed out, Americans' 'real' wages are one of the few things seemingly on the decline this year.

Regardless of what the Federal Reserve does, the economy is heading towards a recession.

The Federal Reserve faces a simple multiple-choice question: either choose higher inflation or higher interest rates.

The Federal Reserve cannot control inflation without raising interest rates, but higher rates will trigger an economic recession.

Moreover, without more stimulus measures, the Federal Reserve will also be unable to prevent interest rates from impacting the economy. However, stimulus will lead to higher inflation, which will in turn result in an economic recession.

Both choices are bad, leading to a dilemma.

Therefore, I believe that a recession will reoccur starting in 2022.

Dartmouth College economics professor David Blanchflower believes that we have entered a new recession.

Blanchflower and his colleague Alex Bryson studied past economic recessions. In a recent paper, they pointed out that consumers rapidly lowering their expectations often heralds a recession.

Forecasters did not anticipate the recession of 2008 at the time. However, Blanchflower and Bryson state that if they had noticed a drop in consumer confidence, they would have been able to predict it.

Consumer confidence sharply declined after reaching its peak this spring. Blanchflower and Bryson issued this warning in their paper: the last time they missed the warning and hope not to miss it again this time.

You should be prepared for a major sell-off in the stock and bond markets next year.

Analyst: MIKE DIBIASE

Compiled by: Samantha