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Until home prices fall, the only buyers will be those who pay cash. So, these are probably people my age. But no, young people with families, they will not be involved in the real estate market. The middle class, the upper middle class—they definitely won't buy anything. Not until prices drop. And meanwhile, jobs in sectors of the economy related to housing will disappear completely.
You're going to see massive layoffs in everything related to home sales, construction, refinancing, all of these related professions: mortgage brokers, realtors, contractors, you know, the workers themselves. The entire industry will grind to a halt until prices drop. But even after prices fall, we won't have any new construction.
However, some real estate transactions will still take place. We're going to have a lot of foreclosures , right? So by that time everything will be in decline. Well, I've always argued: if you admit that we're on an unsustainable path, how do you know when we'll reach the end point? Because I think we're already there.
And I think the markets are finally starting to understand that. Therefore, lenders will demand significantly higher interest rates to lend money to the US government or any other borrower in US dollars because of what Donald Trump just said the other day, it seems, last Friday. Trump said that one of the advantages of inflation is that it reduces our debt very quickly.
And that's not what our creditors want to hear . They don't want to hear that the dollars they get back won't have much value. So, instead of waiting for inflation to destroy the value of their bonds, they will simply withdraw the money now. And that's what's creating downward pressure on bond prices and upward pressure on interest rates.
But the real bad news isn't where the rates are now, but where they're headed. Because they will become much taller. We already have the highest rates since 2002. As we speak, 5-year Treasury bonds are yielding 5.09%, 10- years are yielding 5.33%, and 30-years are yielding 5.69%. These are the highest figures for now, but tomorrow, or maybe even tonight, they will no longer be like that .
But we will continue to move upwards. People forget that we were in a " bull" bond market, which meant falling yields for 40 years. The yield on 10- year Treasury bonds has gone from 16% in 1981 to less than 1% in 2021. You know , during the same period, a 30-year fixed-rate mortgage fell from 18% to 2.5/8%.
Now this process has reversed. Mortgages are now over 7 and 1/2% and Treasury bonds are at 5.33%, and we are heading back to those levels. To understand this shift, it is necessary to analyze four distinct historical eras of American debt . The fundamental period combined moderate deficits with minimal borrowing costs .
The second phase, at the end of the 20th century, was a period of rising debt, leading to higher interest rates that remained manageable due to low overall debt levels. The period after 2008 ushered in a third era: an explosive growth in total liabilities, skillfully disguised by artificially low borrowing costs.
The economy is now entering a final phase, defined by record debt burdened by rising yields. Servicing trillion-dollar obligations on such terms creates a mathematical impossibility, making the country's financial architecture fundamentally unviable. Maybe even higher. But, you know, somewhere between that and that, we're going to have a complete economic collapse, because we have too much debt today to afford to pay that kind of interest.
I've already said in my podcast that we are in the fourth phase of debt. The first period was when we had low debt and low interest rates. And it was wonderful. We didn't borrow a lot of money, the government didn't run deficits, people saved a lot, so we had low interest rates and didn't have a lot of debt.
Then the debt began to grow rapidly in the 1970s and 1980s. As a result, in absolute terms, debt was still low. Just not as low as before, but the bond market was concerned about the accumulation of debt, so interest rates rose significantly. So, we had low debt and high interest rates. The high interest rates were affordable because we didn't have as much debt to which they applied.
The next phase actually began with the 2008 financial crisis . The debt grew even more, but then interest rates collapsed. So back then we had very high debt but very low interest rates. It was this combination that made the enormous debt seem manageable and affordable. And that's what caused all that complacency over the last few decades about accumulating debt, because everyone said, "Well, we can afford it." This is not such a big problem.
Look how low the interest rates are. Well , now we enter the fourth phase: high debt and high interest rates. Of course, we will have the highest debt in history, and perhaps at the same time, the highest interest rates. And this entire economy will explode from within, because it is built on a foundation of debt that cannot be serviced.
The housing market will completely collapse because it was supported by cheap money that no longer exists. By the way, I just talked about this on my last podcast, but people underestimate how important housing was to the consumer economy. After all, consumers were given purchasing power not only by the growth of equity through real estate prices, but also by constant refinancing with cash withdrawals, which Americans had practiced for 40 years: every few years, you could refinance your mortgage , withdraw cash for expenses, and at the same time reduce your monthly payment.
The residential real estate market has relied for decades on low mortgage rates and endless refinancing to support consumer affordability. This liquidity channel is now closed. As mortgage costs approach double digits, the financial gap between property valuations and buyers' affordability continues to widen.
Transaction volumes are falling as the middle class is squeezed out of the market, and those with cash remain the dominant buyers. For the market to work, real estate valuations must undergo a sharp downward correction. This adjustment threatens a serious loss of capital for the middle class, potential bankruptcies for homeowners, and significant loan write-offs at the nation's financial institutions.
It was like a source of endless blessings. This was a lifeline for the consumer that has now been cut. Because there is no more refinancing. Mortgage rates continue to rise , rise, and rise. And the only thing that can change is the price of housing. After all, it was cheap mortgages that made expensive houses affordable.
When mortgage rates go back to 9%, 10%, 11 %, 12%—which is where they are headed—no one, at least most Americans, will be able to afford to buy a house at today's prices . This is simply impossible. So the only way to make a deal is for housing prices to collapse. And this has consequences, because for many Americans it means bankruptcy.
They are ruined; they lost their greatest asset. And for many banks, lenders who have lent huge sums to homeowners, this will mean serious losses. You know, the next Fannie and Freddie bankruptcy will probably be bigger than what we saw in 2008 . It's a good thing that Trump failed to carry out privatization.
Until housing prices fall, only those with cash will buy them. So, these are probably people my age. But no, young people with families, they will not be involved in the housing market. The middle class, the upper middle class— they definitely won't buy. At least until prices drop. And meanwhile, jobs in sectors of the economy related to housing will disappear completely.
We will see mass layoffs in everything related to home sales, construction, refinancing, all these related professions: mortgage brokers, realtors, contractors, laborers—the entire industry will grind to a halt until prices fall . But even after prices fall, we won't have any new construction, although some deals will be happening.
We're going to have a lot of foreclosures, right ? So, by then everything will be dead. Major stock indexes create the illusion of overall financial health, but the breadth of the market paints a very different reality. The stock rally is centered around a few mega- tech corporations, masking general weakness beneath the surface.
While these index heavyweights are absorbing huge capital investments, nearly 60% of the individual components of the S&P 500 have entered a technical bear market. Historically, the stock market cannot ignore constant yield pressure indefinitely. Similar to the dynamics before 1987, rising borrowing costs are dragging down corporate profits over time, threatening a sudden revaluation of stocks once broader markets come to terms with higher fixed-income yields .
The problem is that to a large extent this is not happening because people have created a lot of new wealth. In many ways, this is due solely to rising asset prices. And this was a consequence of inflation. So the same monetary policy that makes groceries so expensive also makes stocks more expensive .
But this has a positive impact on people's wealth. Because, you know, higher food prices , if you're not a farmer, don't help you at all . You need to eat, and you are forced to pay these prices every time you go to the supermarket. But in the stock market, you simply hold your shares and then calculate your wealth based on their current price.
Something must be happening here, because stocks have been rising despite, you know, rising bond yields. Some attribute rising bond yields to capital spending by the G7 . But sooner or later, there will be a clash, because interest rates will not stop rising . So at some point, these higher rates will start to affect the markets and the economy.
So, someday we will see a significant drop in stock prices. You know, markets can ignore rising yields for a while. The most striking example was 1987, when bond yields rose for almost the entire year. Of course, it was much higher then than it is now. But it continued to rise, and the stock market ignored it until the crash in October .
It was the stock market crash that finally stabilized the bond market, and we saw a meteoric rise in bonds when the stock market finally took notice and crashed . So maybe we'll see something like that. I don't know. Payments on the national debt already exceed national defense spending and are rapidly approaching basic social expenditures.
Despite yields close to multi-year highs, foreign central banks are actively reducing the share of dollar-denominated debt securities. Institutions in Asia and Europe are increasingly converting balance sheet reserves into physical gold, accepting zero returns to minimize the risks of systemic default.
This structural shift indicates a fundamental decline in foreigners' confidence in the stability of the treasury market . Former economic policymakers are calling for extraordinary liquidity measures, acknowledging that demand for government bonds is undergoing a permanent structural contraction. Of course, we have a debt of 40 trillion dollars.
And it is growing by two to three trillion a year. Interest already eats up about $1.3 trillion a year. This has already surpassed defense spending, becoming our largest budget item. Next year, it will surpass Social Security spending as we spend over two trillion dollars a year servicing the debt .
We're not even officially in a recession yet. And it became clear that neither the Republican nor the Democratic Party cared about the debt, its size, or government spending. So how can our creditors not worry? It is completely illogical to be so calm now, when there is undeniable evidence that we are heading towards a crisis.
Look what happened to the price of gold. It didn't jump from $2,000 to over $5,000 an ounce in about a year for no reason. And it was n't American speculators or investors who bought it. These were foreign central banks. Why do they do this? They refused the dollar. They are already doing it. Look at what is happening with the Bank of Japan now.
But China did it. Russia started doing this after sanctions. But you know, countries are moving away from the US dollar despite the fact that they could be earning 5% returns on their Treasury bonds. They would be better off owning gold and not getting any income than holding Treasury bonds at 5%. This says a lot about how concerned they are now about the US debt situation.
So for me, this is the most logical explanation. It's just long overdue. This should have happened a long time ago . Lenders should have put everything in order years ago, but they didn't . But you know, now, finally, they're concerned about it. And we don't do anything about it. You know, I was pointing out something interesting, I think maybe a year ago, it was Hank Paulson, the former Treasury Secretary.
He saw that a crisis was coming. So he publicly stated that the US should develop an emergency plan in case demand for Treasury bonds collapses. He did n't even try to say, "Hey, let's do something to prevent a crisis. Let's get our house in order now, before the crisis starts. Let's restore confidence in the bond markets.
Let's cut government spending. Let's reduce the deficit." He knew it was a waste of time. So, in essence, he said, " Listen, we're going to have a crisis. We better have a contingency plan. Because otherwise we're going to have a crisis and we won't even have a plan." The main driver of modern domestic capital has shifted from wealth creation to asset price inflation.
Paper wealth built on inflated balance sheets masks real consumer stress caused by rising daily living costs. Although high stock prices increase equity on paper, they are unable to compensate for the decline in the purchasing power of ordinary income. As monetary tightening forces adjustments to stock multiples and property values, this paper wealth risks disappearing.
The structural clash between rising federal debt, rising real interest rates, and concentrated stock valuations points to a profound reassessment of the modern financial system. That's not even the entire US stock market. You are talking about a few dozen stocks. the entire market. I mean, this is crazy.
The average... I calculated these numbers myself last week. And while the S&P was within 1% of its record high , an average of about 430 of those stocks fell 21.5% from their peaks. It was 430, or about 86% of them. But at the same time, a full 60% of these names themselves fell by more than 20%. So, you have 60% of the S&P in an official " bear" market.
Good. This is madness. That's not even our entire US stock market. It's just our mega-tech stocks, whether it's Nvidia or Meta or Alphabet or Microsoft or these trillion-dollar companies, that collectively...And at the rate this is happening, it's going to get even more distorted. I mean, the numbers are just going to go up and up. So, is this real? Is this just a complete bubble?
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