The economy may face a recession in 2022, and US stocks are about to collapse!?

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

The "market" here refers to the stock market and the corporate bond market, which is much larger than the stock market.

I'm not the only one who thinks so. Michael Burry is one of the few people who can foresee the financial crisis in 2008. In 2007, he bought credit default swaps on mortgage bonds through his hedge fund, betting heavily on a fall in the market.

The deal earned $750 million for Burry investors and $100m for himself. Michael Lewis wrote a book about him, which was later adapted into the movie Big short.

We should all pay attention to Burry.

He doesn't often share his thoughts, and when he does, he usually speaks on Twitter these days.

Now that Burry predicts that the "mother of the crash" is emerging, he says the market is like dancing on the cutting edge. He recently posted a message about the market on Twitter:

More speculative than in the 1920s, higher than the overvaluation of the 1990s, and worse than the geopolitical and economic conflicts of the 1970s.

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

At his hedge fund Thain Asset Management (Scion Asset Management), he cut his portfolio from more than 20 stocks to six at the end of the third quarter.

Not all my colleagues agree with my prediction, but it doesn't matter. After all, no one can foresee the future.

But I think you should consider the views of the analysts and make your own decisions.

2. the corporate debt is ultra-high, the credit quality is ultra-low, and there is a bubble in the bond market.

Having said that, it is hard to say that there are no bubbles in the US stock and bond markets at the moment.

The stock market is up more than 200 per cent from before the last financial crisis in 2009, and the US stock market hit an all-time high almost every week before last week's sell-off. It is now about 40 per cent higher than it was before the COVID-19 epidemic, including about 25 per cent this year.

Meanwhile, corporate debt has nearly doubled from $6,000bn before the last financial crisis to about $11.5 trillion, an almost unfathomable figure.

What is most frightening about these debts is not their size, but their poor quality.

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

Consumer debt can be divided into senior debt and subprime debt, with lower credit ratings and higher credit risk of subprime borrowers.

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

If junk debt is split in half according to credit rating, the lower half (that is, the worst half) accounts for 35% of all junk debt. Before the last financial crisis, it was only about 15 per cent.

Investment-grade bonds are even worse.

More than half (57 per cent) of investment grade debt is the lowest rated BBB, with BBB debt at a new high.

This means that this part of the debt is only one grade away from becoming junk debt, and when the debt is downgraded to junk debt, the price usually falls sharply and collapses.

Don't forget that this is near the lowest interest rate in history, and the company's credit rating is still so low that the cost of debt is not as high as it was when interest rates were high. The interest rate on investment-grade debt paid by companies is less than 2%, and the interest rate on junk debt paid by most companies is less than 5%.

Still, about 1/4 of American companies are barely able to pay interest on their debt, the so-called "zombie companies."

Simply put, corporate debt is at a record high and credit quality is at a record low. This is a bubble.

3. The Federal Reserve has run out of ammunition and the bond market bubble may burst in 2022.

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

The Fed has actually given junk rating companies a lifesaver, which have borrowed record amounts of money over the past two years.

Even zombie companies are surprised how easy it is to borrow money. As David Bernstein, chief financial officer of cruise operator CCL, put it in an interview with the Wall Street Journal: I managed to raise $6.5 billion and was stunned.

The Fed's unprecedented move only inflated bubbles further, but like all bubbles, you can't let them inflate forever.

Identifying bubbles is on the one hand, and it is much harder to predict when they will burst.

But I personally think the bubble will eventually burst in 2022 because the Fed runs out of bullets.

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

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

Inflation had risen to 1.6%, which federal reserve chairman Jerome Powell called "temporary".

I never believed it. I explained why inflation continues to rise and why it is likely to remain high (well above the Fed's 2% inflation target).

The latest inflation rate in November was 6.8%, the highest level in 40 years. Powell finally admitted that the Fed should withdraw the word "temporary".

He now says high inflation should last until mid-2022.

I don't know what you think of this, but I will no longer focus on Powell's remarks on inflation, he is completely unreliable.

I think the inflation rate will be higher and the high inflation will continue. The reason has nothing to do with the bottleneck in the supply of consumer goods, although everyone says it is.

You can look at the M2 money supply in the United States, which includes cash, checking and savings accounts, and money market mutual funds.

Since the outbreak, M2 money supply has increased significantly:

Since the end of 2019, M2 money supply has increased by $6 trillion, or nearly 40%. By contrast, M2 money supply has grown by an average of about 6 per cent a year since 2000, 26 per cent last year and 9 per cent in the first three quarters of this year.

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

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

That's why I think inflation will continue. In the coming months, inflation will eventually stabilize below 5%. But for the foreseeable future, inflation will remain well above the Fed's 2 per cent target.

No matter what the Fed does to deal with inflation, it will prick the credit bubble.

The Fed has two ways to deal with inflation: reducing the money supply or raising interest rates.

Either way will prick the credit bubble.

Don't expect the Fed to plan to reduce the money supply in the short term. The only way it can do that is to sell Treasuries (the Fed doesn't even have a proposal yet) or ask banks to tighten credit.

Both of these methods will lead to higher interest rates. Xiaobai Maimai Inc's tightening is more than enough to prick the credit bubble.

As we all know, the Fed is planning to fight inflation by slowly raising interest rates, but slowly, it does so in two ways.

The Fed is doing this indirectly by reducing (or what it calls "scaling back") its bond purchases. The Fed has curtailed its purchases of Treasuries by $15 billion a month since November and has now expanded to $30 billion. Since the start of the epidemic, the Fed has bought about $80 billion to $100 billion worth of Treasuries a month, accounting for about 60% of total Treasury purchases.

Without the demand for manual intervention by the Fed, Treasury prices would no doubt have fallen. When Treasury prices fall, interest rates rise, including five-year, 10-year and 30-year rates.

The Fed also raises interest rates directly by raising one of the interest rates it controls, the federal funds rate, which banks charge for short-term overnight loans from other banks.

The Fed recently said it would raise interest rates three times next year and three more times in 2023. The proposed rate hike is small, with only 1.5 percentage points by the end of 2023.

The Fed must act slowly, knowing that it cannot raise interest rates too quickly, or it will turn the recovery into a recession.

But at that rate, it will take years for the Fed to raise interest rates high enough to catch up with inflation.

You can see this in the "real" interest rate, where the yield on the 10-year Treasury note is-5.4%, taking into account current inflation.

But persistently high inflation will not slow the Fed down. If the Fed is really going to fight inflation, it must speed up. In other words, interest rates are about to rise sharply.

Higher interest rates on treasury bonds will have a knock-on effect on the economy as a whole, leading to increases in other interest rates, including mortgage rates, corporate bond rates and so on.

As interest rates rise, hundreds of companies may go bankrupt as they try to refinance maturing debt. Credit will suddenly collapse, which could trigger the biggest wave of bankruptcies we have ever seen and lead to the collapse of credit markets.

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 and profits are increasing. But a lot of zombies go bankrupt.

Here are the 10 largest zombie companies that may file for bankruptcy as interest rates rise. You don't want to include these companies in your portfolio, they can't afford to repay their debt now, and it will be difficult for them to refinance the debt that is due in the next few years.

As can be seen from the picture above, many companies on the verge of bankruptcy are in the industries hardest affected by the epidemic, including aviation, cruise ships and cinemas.

But even before the outbreak, these companies were already heavily in debt, and the epidemic would only make their situation worse. I suggest avoiding these companies at all costs.

6. High interest rates will plunge the economy into recession and stimulate the rise of consumer credit

I know you think this way: if the economy starts to fall into recession, the Fed may hit the brakes. The Fed is likely to slow down its bond purchases and start buying Treasuries again to keep interest rates low in the event of market panic.

Indeed, economist Nouriel Roubini agrees. Roubini is a professor at the Stern School of Business at New York University. Like Michael Burry, he predicted the financial crisis in 2008. Roubini thinks the Fed will get cold feet.

As he said in an interview with Bloomberg:

The Fed will delay completing the process of cutting or raising interest rates.

But as I said earlier, the Fed is out of bullets. If it does flinch, it means more stimulus and higher inflation.

Consumers can only afford higher prices for a long time.

Persistent inflation suppresses the poor and middle class, for which food, clothing and energy costs account for a larger share of their budgets.

Many families continue to increase their credit card debt in order to pay their bills. Consumer credit fell for most of 2020 as people used Fed stimulus spending to repay debt. But as bank account balances dwindled, consumer credit began to rise again.

High inflation reduces discretionary consumption, which will lead to a slowdown in economic growth and an increase in debt for the economy as a whole.

As Michael Burry points out, Americans'"real" wages are one of the few things that seem to have fallen this year.

No matter what the Fed does, the economy is heading for recession

The Fed's choice question is simple: either higher inflation or higher interest rates.

The Fed cannot control inflation without raising interest rates, but higher interest rates can trigger a recession.

And without more stimulus, the Fed will not be able to stop the impact of interest rates on the economy. But stimulus will lead to higher inflation, leading to a recession.

Neither choice is good and is caught in a dilemma.

So I think there will be another recession starting in 2022.

'We have ushered in a new recession, 'says David Blanchflower, an economics professor at Dartmouth College.

Blanchflower and his colleague Alex Bryson studied past recessions. In a recently published paper, they pointed out that the sharp downward revision of consumer expectations is often a harbinger of recession.

Forecasters did not foresee a recession in 2008. But Blanchflower and Bryson say they should have predicted it if they noticed a decline in consumer confidence.

Consumer confidence fell sharply after peaking this spring. Blanchflower and Bryson issued this warning in their paper: they missed the warning last time, and I hope they won't miss it again this time.

You should prepare for a big sell-off in the stock and bond markets next year.

Analyst: MIKE DIBIASE

Compilation: Samantha