This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!” Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).
Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust. The Tech bubble was a stock bubble. The 2007 bust was a housing bubble. This next bust will be the sovereign bond bubble. Why does this matter? Because of the dreaded “C word” COLLATERAL. In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system. This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage. This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there). Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009. More