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DELRAY BEACH, Florida ? It's hot in Florida. Steamy hot. Hair curls and bodies go limp.

The ?relief rally? continued yesterday. All over the world, stocks gained. So did oil and commodities. (More on that below in today's Market Insight.)

The Dow was up 369 points ? a 2.3% move. Chinese stocks were up by about 5%.

Why?

U.S. GDP numbers for the second quarter came out higher than expected. The economy grew by an annual rate of 3.7%.

And influential New York Fed chief William Dudley said the argument for a rate increase in September was ?less compelling.?

A Decline in Excess of 50%

Oh, ye of little faith? fear not! Things are happening just as they should.

It is the end of summer. Markets are giving strong hints of things to come in the fall.

Like Vesuvius, a plume of smoke rises? and a cloud of dust hangs over the markets. The economic earth rumbles? and animals take flight.

But in come the cronies to tell us not to worry about it.

And who knows what happens next?

Your editor is a fairly good plumber. He can put the pipes together and unclog the toilet. Alas, his record as a market soothsayer is spotty. He is rarely wrong, but often so early that by the time the event occurs even he has forgotten he ever predicted it.

But today we are encouraged and emboldened. We swagger ahead, like a reedy poet into a rough bar, confident in the knowledge that there are giants behind us.

Yes, economist and money manager John Hussman's forecast is similar to our own. From his most recent note for Hussman Fund clients:

If you roll a wheelbarrow of dynamite into a crowd of fire jugglers, there's not much chance things will end well. The cause of the inevitable wreckage is not the dynamite, but the trigger is the guy who drops his torch.

Likewise, once extreme valuations are established as a result of yield-seeking speculation that is enabled (1997-2000), encouraged (2004-2007), or actively promoted (2010-2014) by the Federal Reserve, an eventual collapse is inevitable.

By starving investors of safe return, activist Fed policy has promoted repeated valuation bubbles, and inevitable collapses, in risky assets.

On the basis of valuation measures having the strongest correlation with actual subsequent market returns, we fully expect the S&P 500 to decline by 40% to 55% over the completion of the current market cycle. The only uncertainty has been the triggers.

A $12 Trillion Wealth Wipeout

A ?decline in excess of 50%? within ?less than three years? is our forecast.

We will stick with it, hoping to live long enough to see it proven correct, or in any case hoping to live long enough to see how it turns out.

But this forecast is for real (adjusted for inflation) prices, not nominal prices. Because we have a feeling that the feds will not stay in their seats as the government loses revenues, zombies rise in rebellion, and cronies and campaign contributors lose much of their net worth.

As of this May, the combined market cap of the companies listed on the New York Stock Exchange was $19.7 trillion. A 50% plunge would wipe out about $10 trillion in investor wealth, give or take a few billion dollars.

More ?reflationary? monetary policies are no doubt in the pipeline?

Real estate would most likely go down, too ? especially at the upper end.

The house in Florida on the market for $139 million that wereported on last week, for example, would have to be sold at auction.

How much would it bring?

$10 million? $50 million? Who knows?

Debt in Distress

The junkiest, riskiest part of the bond market would also be destroyed.

When the going gets tough, the ?spread? (or gap between yields) on junk bonds over U.S. Treasury bonds widens, as bond investors bail out of their riskier positions.

Whole sectors could go broke. Here's Bloomberg with a report on debt in the oil patch:

At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it.

The number of oil and gas company bonds with yields of 10% or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe, and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades.

If oil stays at about $40 a barrel, the shakeout could be profound.

Forward ? to DisasterEasy come. Easy go. It doesn't take too much imagination to see the EZ money of the last seven years going back where it came from ? to nowhere.

And then, what would Saint Janet do?

Even now, under less stressful conditions (let us assume that markets stay calm), will she raise rates next month as expected?

Probably not?

Consumer prices, as officially measured, are stable, not rising. And inflation expectations have dropped to a five-year low. Unemployment and GDP numbers make it look as though the economy is running okay. But don't look under the hood!

And with the stock market so fragile, would Saint Janet risk being the one to cause a worldwide panic?

Nah? No rate increase in September.

Instead, when the crash resumes, we will see even EZ-ier money, not tighter money. We are on course for a ?hormegeddon?-style outcome. (Hormegeddon is the term I coined in my latest book for ?disaster by public policy.?)

Backing up is not an option. We must go forward ? to disaster.

Regards,

Bill Bonner
for The Daily Reckoning

Originally posted at Bill Bonner's Diary, right here.

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The post This Market Is a "Wheelbarrow of Dynamite" Waiting to Blow appeared first on Daily Reckoning.