If you have not yet read Part I:  Four Signs That We're Back in Dangerous Bubble Territory, available free to all readers, please click here to read it first.

In Part I, we discussed four signs that we are in bubble territory – in both stocks and bonds – plus all of the usual rationalizations that accompany bubbles. In truth, there are many more signs which we'll discuss further here, and I want to go deeper into the data exploring the warning signs in the equity and bond markets.

I want to spend time cataloging and explaining my reasoning because when bubbles burst, it's traumatic for everyone, but especially those that aren't prepared.

Further, these bubbles are so large that it's useful to employ historical analogues to weigh them against and parse for clues as to just how bad developments could get.

The Big Picture

What we do at Peak Prosperity is track the big picture. We look at the macro risks and trends, and try to figure out what's coming next. Over the long haul. we have very little doubt that several decades of debt accumulation partnered with structurally higher oil prices will result in anything other than reduced standards of living for most people.

And that’s if everything goes smoothly.

At the other end of the spectrum lies the potential for currency, political, and fiscal crises, the likes of which have never been seen before, given the global nature of the situation.

Leaving oil prices aside for the moment, in purely economic terms, living beyond one’s means now necessitates living below one’s means later on. Whether that period of negative adjustment is the same length and depth, shorter and deeper, or longer and shallower is open to question. But I'm leaning towards ‘shorter and deeper’ because history shows that bubbles tend to burst more rapidly than they form.

That is, we could view this as a bubble in financial assets, particularly credit (debt), but we could just as easily view it as a bubble in living standards. We overdid things and now it's just a question of figuring out who is going to eat the losses. Historically, that answer has always been 'the little people,' but today we have dropped such disparaging terms in favor of the more politically palatable 'taxpayers.'

To understand the current predicament, the most important chart to look at is the ratio of total national debt to GDP (debt-to-income)…