The stock market gets all the financial news headlines, but it's the credit markets that hold the real power. Or to put it a more colorful way:
“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
- James Carville

So what is the bond market saying these days?

The financial media tend to report breathlessly about what the stock market did yesterday. But savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going.
And right now, if the bond market is correctly predicting the economic path ahead, we should all be terrified...
The long-term interest rates that currently prevail across all the major advanced economies are consistent with a disastrous economic future.

Bonds are trading at record highs. Meaning yields are at historic lows. Long-term interest rates are at the lowest levels in the 227-year history of rates in the United States.

That would normally signal an economy on the brink of ruin and investors panicking into government bonds.

However, the stock market is telling a very different story.
The stock market is hitting all-time highs, despite declining earnings expectations.

Analysts estimate net income at S&P 500 companies will drop 5.8 percent in the second quarter, which would make it a fifth straight decline, the longest streak since 2009.

Rising stock prices and falling earnings means, much like bonds, stocks have rarely been so expensive.

Valuations are already at historical extremes. The S&P 500 trades at a forward P/E of 17.6x, ranking in the 89th percentile since 1976. At 18.4x, the median constituent ranks in the 99th percentile. Most other metrics such as P/B, EV/EBITDA, and EV/Sales paint a similar picture. These valuations are only justifiable because of the historically low interest rate environment.

The story stocks are telling is: the stock market is more euphoric about future growth ever before.

Bonds are pricing in Armageddon while stocks are pricing in a new Golden Age.
One of them has to be wrong. Maybe both.
But for certain, someone is very, very wrong.

It's a guessing game which one of these markets are the most overvalued, but if I was to guess I would say that bonds are the most overpriced.

Neil Dwayne, global strategist at Allianz Global Investors, is still buying. “Every piece of analysis we do on the bond market tells us they are structurally overvalued,” he said. But he is buying Treasurys anyway. “That’s what you have to do when you have the ludicrous valuations in Europe and Japan.”
...Simply, there is a limit to how negative yields can go before money becomes meaningless.

While stocks can still get more expensive, the mind-boggling amount of bonds with negative yields is rapidly reaching it's physical and logical limits. Not only that, the bond market is picking up speed as it approaches the wall.

In February 2015, the total amount of negative-yielding debt in the world was ‘only’ $3.6 trillion.
A year later in February 2016 it had nearly doubled to $7 trillion.
Now, just five months later, it has nearly doubled again to $13 trillion, up from $11.7 trillion just over two weeks ago.
Think about that: the total sum of negative-yielding debt in the world has increased in the last sixteen days alone by an amount that’s larger than the entire GDP of Russia.

Already a third of all sovereign debt yields a negative interest rate. That means that investors are effectively paying borrowers to lend to them.
That's bizarre. Not to mention unsustainable.

How unsustainable? Short-term unsustainable.

At the current rate of decline, the entire global market will be in subzero land by the end of the year.

"By the end of the year." After that rates stop falling and the bond bull market is over.
Some of you may be thinking, "Well that's only sovereign bonds. There is still the muni bond market and corporate bonds."
It's already too late for munis.

The price of junk-rated Ohio tobacco debt that may never be paid in full has climbed 14 percent since the start of the year. New York City’s Albert Einstein College of Medicine sold $175 million of unrated securities in January at par for a yield of 5.5 percent. Now, they’re worth 122 cents on the dollar and yield 2.8 percent, according to data compiled by Bloomberg. Even those issued by Puerto Rico, which has been defaulting on a growing share of its debt, have returned 8.4 percent.

The same Puerto Rico that just defaulted on $2 Billion in debt.
The same Puerto Rico that just got it's credit rating cut by Fitch to 'D'.
Note that a rating of 'D' is BELOW junk.
If you loaned money to this dead-beat, your return on investment would have been DOUBLE the stock market this year.

Wait a sec. Making money by loaning money to broke dead-beats.
Where have I heard this before? I seem to remember something about this in housing from a decade ago.

As for corporate bonds, consider what corporations already have negative yielding bonds.

None of these companies are triple-A rated. Several of them are borderline junk. And yet people are still paying money to lend to companies that will likely default.
In what world does that make sense?

It doesn't stop at the financial markets.
It's spilling out into the real estate market.

The share of Americans' total personal income coming from rental profit rose to a record 4.4 percent in the first quarter of 2016, data released in June show. That's at an all-time high in figures dating back to 1947, and is up from just 0.7 percent thirty years ago.

The flip side of this story is that poor renters are paying more money in rent to wealthier landlords than at any time in recorded history.

The cost for renting a home grew by 3.5 percent in the year through June, a post-recession high and above overall price gains excluding shelter, food and energy, of 1.4 percent.
Shelling out high rent payments makes it hard for households to save for a down payment....That means even as homeownership becomes a bigger portion of Americans' total income, it is also increasingly exclusive. The U.S. homeownership rate fell to 63.5 percent in the first quarter, holding near a 48-year low.