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In his speech on April 7 2010 at the Economic Club of New York the President of the New York Fed, William Dudley argued that asset bubbles pose a serious threat to real economic activity.

The New York Fed chief is of the view that the US central bank should develop effective tools to counter this menace.

According to Dudley, it should be the role of the Fed to stop the expansion of the bubble whilst it is still in the making.

By an asset bubble, I mean price increases (or declines) that become unmoored from fundamental valuations.^[1]

Dudley is of the view that the way people trade also generates bubbles. On this, he suggests that,

Bubbles may simply emerge from the way market participant’s process information and trade. In many carefully controlled experiments in which the intrinsic value of the asset could be determined with certainty, participants still bid prices up far above fundamental valuations, with the bubbles being followed by sharp declines in prices.^[2]

Furthermore, Dudley is of the view that,

A bubble is difficult to discern and, second, each bubble has unique characteristics. This implies that a rules-based approach to bubbles is likely to be ineffective and that tackling bubbles to diminish their potential to destabilize the financial system requires judgment.^[3]

In conclusion, the New York Fed President has suggested,

Let me underscore the challenge that central bankers face in combating asset price bubbles. Doing so effectively requires us to be successful in both identifying the incipient bubble and in developing and implementing a response that will limit bubble growth and avert a destructive asset price crash. This is not easy because asset bubbles are hard to recognize in real time and each asset bubble is different. However, these challenges cannot be an excuse for inaction.^[4]

The Fed and bubbles – is there any relation?

…click on the above link to read the rest of the article…

John Law and the Mississippi Bubble – 300 Years Later

September 9, 2018

John Law and the Mississippi Bubble – 300 Years Later

Most people are aware that historically there have been speculative bubbles. Some of them can even name a few – the South Sea bubble, tulips, and more recently dot-coms. Some historians can go even further, quoting the famous account by Charles Mackay of the South Sea bubble, the tulip mania and the Mississippi bubble, published in the mid-nineteenth century.

The most valuable bubble empirically for the purpose of our elucidation has to be the Mississippi bubble, whose central figure was John Law. Law, a Scotsman whose father’s profession was as a goldsmith and banker in Edinburgh, set up an inflation scheme in 1716 to rescue France’s finances. He proposed to the Regent for the infant Louis XIV a scheme that would be based on a new paper currency.

Law was a somewhat louche character, who in his Continental travels had spent his mornings studying finance and the principles of trade, and the evenings in the gaming-houses of Europe. He was a successful gambler, because of his ability to calculate odds.

Some similarities with the personality of Keynes two hundred years later are striking. Keynes was a mathematician first, and an economist second. Their approach was also similar: see a problem and try to find a solution, instead of seeing a problem and trying to understand why it existed before solving it. Both Law and Keynes felt that sound money was too restrictive for the enhancement of an economy.

Consequently, much of what Law proposed and then enacted in France rhymes with our neo-Keynesian world today. The difference, perhaps, is that when given the opportunity, Law seized it, and had ultimate financial and monetary power. He harnessed the roles of a central bank, monopolist in international trade, stock promoter and finance minister.

…click on the above link to read the rest of the article…

Once the Bubbles Pop, We’re Broke

August 31, 2018

Once the Bubbles Pop, We’re Broke

I hate to break it to you, but the everything bubble isn’t permanent.

OK, I get it–the Bull Market in stocks is permanent. Bulls will be chortling in 2030 that skeptics have been wrong for 22 years–an entire generation. Bonds will also be higher, thanks to negative interest rates, and housing will still be climbing higher, too. Household net worth will be measured in the gazillions.

Here’s the Fed’s measure of current household net worth: a cool $100 trillion, about 750% of disposable personal income (DPI):

Household net worth has soared $30 trillion in the past decade of permanent monetary and fiscal stimulus. No wonder everyone is saying Universal Basic Income (UBI)– $1,000 a month for every adult, no questions asked–is affordable, along with Medicare For All (never mind that Medicare is far more expensive than the healthcare provided by other advanced nations due to rampant profiteering, fraud and paperwork costs–we can afford it!)

And we get to keep the Endless Wars ™, trillion-dollar white elephant F-35 program, and all the other goodies–we can afford it all because we’re rich!

We’re only rich until the bubbles pop, which they will. All speculative bubbles deflate, even those that are presumed permanent, And when the current everything bubble pops, net worth–and all the taxes generated by bubble-era capital gains–vanish.

Take a look at the Federal Reserve’s Household Balance Sheet (June 2018):
$34.6 trillion in non-financial assets
$81.7 trillion in financial assets
$15.6 trillion in total liabilities ($10 trillion of which is home mortgages)
$100 trillion in net worth

So $25 trillion is in real estate. When the housing bubble pops, $10 trillion will go poof. Maybe $12 trillion, but why quibble about a lousy $2 trillion? We’re rich!

…click on the above link to read the rest of the article…

Weekly Commentary: $247 Trillion and (Rapidly) Counting

July 20, 2018

Weekly Commentary: $247 Trillion and (Rapidly) Counting

I chronicled mortgage finance Bubble excess on a weekly basis. Relevant data were right there in plain sight, much of it courtesy of the Federal Reserve. Yet only after the Bubble burst did it all suddenly become obvious. Flashing warning signs were masked by manic delusions of endless prosperity and faith in the almighty “inside the beltway”. These days, data for the global government finance Bubble is not as easily-accessible, though there is ample evidence for which to draw conclusions. It will all be frustratingly obvious in hindsight.

The Institute of International Finance is out with their latest data that, unfortunately, is not made available in detail to the general public. Global debt ended the first quarter at a record $247 Trillion, or 318% of GDP. Even after a decade of historic Credit inflation, global debt continues to expand at (“Terminal Phase”) double-digit rates (11.1% y-o-y).

Global debt growth accelerated during the first quarter to $8.0 Trillion – and surged $30 Trillion over just the past five quarters. In a single data point not to be disregarded, Global Debt Has Expanded (a difficult to fathom) $150 Trillion, or 150%, Over the Past Ten Years. Actually, the trajectory of Bubble-period Credit expansion may seem rather familiar. It’s been, after all, a replay of the reckless U.S. mortgage Credit episode, only on a much grander global scale.

July 10 – Financial Times (Jonathan Wheatley): “The amount of debt in the world increased by nearly $25tn in the year to the end of March, piling more pressure on a global financial system already struggling to deal with rising US interest rates, widening spreads for borrowers and a strengthening US dollar. The Institute of International Finance… said total debts owed by households, governments and financial and non-financial corporations amounted to $247.2tn at the end of March, up from $222.6tn a year earlier and an increase of nearly $8tn in the first quarter alone.

…click on the above link to read the rest of the article…

Here We Go Again: Our Double-Bubble Economy

June 14, 2018

Here We Go Again: Our Double-Bubble Economy

The bubbles in assets are supported by the invisible bubble in greed, euphoria and credulity.

Well, folks, here we go again: we have a double-bubble economy in housing and stocks, and a third difficult-to-chart bubble in greed, euphoria and credulity.

Feast your eyes on Housing Bubble #2, a.k.a. the Echo Bubble:

Here’s the S&P 500 stock index (SPX): no bubble here, we’re told, just a typical 9-year long Bull Market that has soared from a low in 2009 of 666 to a recent high of 2802 in January of this year:

Here’s a view of the same bubble in the Dow Jones Industrial Average (DJIA):

Is anyone actually dumb enough not to recognize these are bubbles? Of course not. Those proclaiming that “these bubbles are not bubbles” know full well they’re bubbles, but their livelihoods depend on public denial of this reality.

And so we’re inundated with justifications of bubble valuations, neatly bound with statistical mumbo-jumbo: forward earnings (better every day in every way!), P-E expansion, and all the rest of the usual blather that’s spewed by status quo commentators and fund managers at the top of every bubble.

The problem with bubbles is they always pop. The market runs out of Greater Fools and/or creditworthy borrowers, and so sellers overwhelm the thinning ranks of buyers.

Those dancing euphorically, expecting the music will never stop, are caught off guard (despite their confidence that they are far too clever to be caught by surprise), and the panic-driven crowd clogs the narrow exit, leaving a ballroom of bag-holders to absorb the losses.

The other problem with bubbles is that we’ve become dependent on them as props holding up a rotten, corrupt status quo. Since the economy can no longer generate sufficient prosperity to go around via actual increases in productivity and efficiency, those skimming most of the gains rely on “the wealth effect” generated by expanding asset bubbles to create a dreamy illusion of prosperity.

…click on the above link to read the rest of the article…

Weekly Commentary: Conventional Wisdom

April 30, 2018

Weekly Commentary: Conventional Wisdom

Conventional Wisdom is so often proved wrong. Thinking back over my career, it’s amazing how many times what is believed true without a doubt in the markets turns out completely erroneous. There’s no mystery behind this phenomenon. Responsibility lies foremost in flawed analytical frameworks. Fundamentally, bull market psychology rests on the basic premise that underlying fundamentals are sound – economic growth, earnings, inflation dynamics, new technologies, global trade, etc. No need to look further or dig any deeper.

When securities markets are strong (inflating), it’s taken as a given that the financial system is robust. The problem, however, is that the underlying finance fueling the recent bull market has been patently unsound – and has been so for three decades of recurring boom and bust cycles.

A wise person said that it’s not true that we don’t learn from history. It’s that our learning is dominated by recent history. It becomes too easy to ignore everything beyond the past few years. Over a relatively short time horizon, the previous bust cycle becomes ancient history. What matters for the markets – especially as the cycle evolves to the speculative phase – is the here and now. It’s assumed that everyone acquired understanding and insight from the crisis experience – especially policymakers. They’ll ensure there is no repeat; they have the tools and have amassed experience and comfort employing them. The previous crisis was a “100-year flood.” Good not to have to ponder a recurrence for a few generations.

Conventional Wisdom will look especially foolish when this protracted cycle comes to its fateful conclusion. Not only was the mortgage finance Bubble not the proverbial “100-year flood,” it set the stage for historic global government finance Bubble excesses. The real once-in-a-lifetime crisis lies in wait. Not only do we not learn from our mistakes, we instead seem to go out of our way to create bigger ones. This time much Bigger. This predicament was on full display this week.
…click on the above link to read the rest of the article…

Jerome Is The New Janet: Tie, Trousers And Same Old Keynesian Jabberwocky

April 11, 2018

Jerome Is The New Janet: Tie, Trousers And Same Old Keynesian Jabberwocky

The election of 2016 was supposed to be the most disruptive break with the status quo in modern history, if ever. On the single most important decision of his tenure, however, the Donald has lined-up check-by-jowl with Barry and Dubya, too.

That is to say, Trump’s new Fed chairman, Jerome Powell, amounts to Janet Yellen in trousers and tie. In fact, you can make it a three-part composite by adding Bernanke with a full head of hair and Greenspan sans the mumble.

The overarching point here is that the great problems plaguing American society—scarcity of good jobs, punk GDP growth, faltering productivity, raging wealth mal-distribution, massive indebtedness, egregious speculative bubbles, fiscally incontinent government—-are overwhelmingly caused by our rogue central bank. They are the fetid fruits of massive and sustained financial repression and falsification of the most import prices in all of capitalism—–the prices of money, debt, equities and other financial assets.

Moreover, the worst of it is that the Fed is overwhelmingly the province of an unelected politburo that rules by the lights of its own Keynesian groupthink and by the hypnotic power of its Big Lie. So powerful is the latter that American democracy has meekly seconded vast, open-ended power to dominate the financial markets, and therefore the warp and woof of the nation’s $19 trillioneconomy, to a tiny priesthood possessing neither of the usual instruments of rule.

That is to say, never before in history has a people so completely and abjectly surrendered to an occupying power—even though its ostensibly democratic government already possessed all the votes and all the guns.

…click on the above link to read the rest of the article…

Wolf Richter: The Era Of The Fed “Put” Is Over

April 3, 2018

Wolf Richter: The Era Of The Fed “Put” Is Over

It now wants lower asset prices (just not too fast)

To all those investors expecting the Fed to step in to backstop the recent weakness seen in the stock market, Wolf Richter warns: The cavalry isn’t coming.

After years of force-feeding too much liquidity into world markets, the central banking cartel is now aware of the Franken-markets it has created. And now with a new head at the US Federal Reserve, and soon at the ECB, central bankers have shifted their priority from supporting asset prices to now actively engineering lower prices.

They just don’t want prices to drop too far too fast.

Of course, the big question is: how much control do they really have? The situation may very quickly get out of their hands.

But the big takeaway is to expect lower prices across the board for nearly every “risk on” asset: stocks (including and especially the FANGS), corporate bonds and real estate. The Fed is working to reduce investor exuberance — and as many bloodied contrarian investors will warn you — Don’t fight the Fed:

Now we’re in an environment where we have an Everything Bubble, and even though there’s still a few central bankers out there that say that they can’t see the bubble, others have now acknowledged it. Of course they don’t call it a “bubble”; they say that prices are “elevated”. So they’re seeing this. In my opinion, a lot of the responses from the Fed are not really about inflation; they’re really about trying to avoid the asset bubble from getting any bigger. They’re trying to avoid a deflation of that asset bubble that could be very messy for the financial system.

…click on the above link to read the rest of the article…

Worst Case Scenario: What is It?

March 20, 2018

Worst Case Scenario: What is It?

This article provides insight as to the way the Fed and all central banks think.

A worst-case scenario is a concept in risk management wherein the planner, in planning for potential disasters, considers the most severe possible outcome that can reasonably be projected to occur in a given situation.

The book Worst Case Scenario Extreme Edition provides hands-on strategies for surviving an elephant stampede, a 16-car pile-up, a mine collapse, and a nuclear attack. Discover how to take a bullet, control a runaway hot air balloon, break a gorilla’s grip, endure a Turkish prison, free a limb from a beartrap, chased by a pack of wolves, or buried alive.

Alas, the book does not cover worst case Fed scenarios brought about by Fed policies.

Insight into Central Bank Thought Processes

The following video explains the way the Fed thought in 2006 and thinks again today regarding “worst case scenarios”

Please play the video. It’s a real hoot.

The alleged “stress tests” in Europe and the US are bogus.

Currently, the ECB believes Italy will never leave the eurozone and the EU cannot break up.

The Fed does not believe they have blown another bubble.

The interesting thing is the Fed is the very purveyor of bubbles. They do not see it and never will.

The result is bubbles of increasing amplitude over time.

Fed Uncertainty Principle

Let’s do another flashback,. This time to April 3, 2008 to my article Fed Uncertainty Principle.

…click on the above link to read the rest of the article…

Weekly Commentary: Anbang and China’s Mortgage Bubble

February 24, 2018

Weekly Commentary: Anbang and China’s Mortgage Bubble

The Shanghai Composite traded as high as 3,587 intraday on Monday, January 29th, a more than two-year high. This followed the S&P500’s all-time closing high (2,873) on the previous Friday. On February 9th, the Shanghai Composite traded as low as 3,063, a 14.6% decline from trading highs just nine sessions earlier. In U.S. trading on February 9th, the S&P500 posted an intraday low of 2,533, a 10.7% drop from January 26th highs. Based on Friday’s closing prices, the Shanghai Composite had recovered 43% of recent declines and the S&P500 70%.

Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.

February 21 – Bloomberg: “China stopped updating its homegrown version of the VIX Index, taking another step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week. State-run China Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered CSI’s inquiry line said the company stopped updating the measure to work on an upgrade. The move was designed to curb activity in the options market, said people familiar with the matter… It’s unclear when the index will resume.”

Derivatives rule the world. Of course, Chinese authorities had few issues with booming options trading when markets were posting gains. Here in the U.S., regulators will supposedly now keep a more watchful eye on VIX-related products.

…click on the above link to read the rest of the article…

Don’t Worry, It’s Only a “Pre-Bubble”

February 23, 2018

Don’t Worry, It’s Only a “Pre-Bubble”

Ray Dalio, who embarrassed himself saying “You’re Going to Feel Pretty Stupid Holding Cash” offers more silliness.

Ray Galio, the head of the world’s largest hedge fund says U.S. in a ‘Pre-Bubble Phase’ with a 70% Chance of Recession.

“I think we are in a pre-bubble stage that could go into a bubble stage,” the hedge-fund manager said during a Harvard Kennedy School’s Institute of Politics on Wednesday.

Dalio’s recession comments echo remarks he has made over in a LinkedIn post, where he wrote that “the risks of a recession in the next 18-24 months are rising.”

“Stupid to Hold Cash”

Despite his recession call, Dalio is the same person who told the crowd at Davos, ‘If You’re Holding Cash, You’re Going to Feel Pretty Stupid’.

Dalio is also a believer in the sideline cash theory and that we may see a “Minor Correction“.

In a LinkedIn article following the VIX-related plunge, Dalio said We’ve Just Had a Taste of What the Tightening Will Be Like.

The headline sounds bearish, but the message sure isn’t, as the key paragraph explains.

“Still, these big declines are just minor corrections in the scope of things, there is a lot of cash on the side to buy on the break, and what comes next will be most important.”

Inundated With Cash

In the CNBC interview, Dalio also spoke of sideline cash.

“There is a lot of cash on the sidelines. I don’t mean just investor cash. I think banks have a lot of cash. Corporations have a lot of cash. So we are going to be inundated with cash.”

Sideline Cash Rebuttal

…click on the above link to read the rest of the article…

What Just Changed?

February 12, 2018

What Just Changed?

The illusion that risk can be limited delivered three asset bubbles in less than 20 years.

Has anything actually changed in the past two weeks? The conventional bullish answer is no, nothing’s changed; the global economy is growing virtually everywhere, inflation is near-zero, credit is abundant, commodities will remain cheap for the foreseeable future, assets are not in bubbles, and the global financial system is in a state of sustainable wonderfulness.

As for that spot of bother, the recent 10% decline in stocks: ho-hum, nothing to see here, just a typical “healthy correction” in a never-ending bull market, the result of flawed volatility instruments and too many punters picking up dimes in front of the steamroller.

Now that’s winding up, we can get back to “creating wealth” by buying assets–$2 million homes in Seattle that were $500,000 homes a few years ago, stocks, bonds, private islands, offshore wealth funds, bat guano, you name it. Just borrow whatever you need to borrow to buy more.

(But don’t buy bitcoin. No no no, a thousand times no. It is going to zero, Goldman Sachs guaranteed it.)

Ahem. And then there’s reality: something has changed, something important.What changed? The endlessly compelling notion that risk has magically vanished as the result of financial sorcery is now in doubt. If risk hasn’t been made to disappear, and even worse, can’t be corralled into a shortable instrument like VIX, then–gasp–every asset and instrument might actually be exposed to some risk.

As I’ve noted many times here, risk cannot be made to disappear; it can only be transferred onto others or off-loaded into the financial system itself. Risk can be cloaked or masked, and indeed, that is the beating heart of financial alchemy: we can eliminate risk by hedging via exotic instruments.

…click on the above link to read the rest of the article…

Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences

January 26, 2018

Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences

In Part 1 we noted that the real evil of Bubble Finance is not merely that it leads to bubble crashes, of which there is surely a doozy just around the bend; or that speculators get the painful deserts they fully deserve, which is coming big time, too; or even that the retail homegamers are always drawn into the slaughter at the very end, as is playing out in spades once again. Daily.

Given enough time, in fact, markets do bounce back because capitalism has a inherent urge to grow, thereby generating higher output, incomes, profits, wealth and stock indices. That means, in turn, investors eventually do recover from bubble crashes—notwithstanding the tendency of homegamers and professional speculators alike to sell at panic lows and jump back in after most of the profits have been made—or even at panic highs like the present.

Instead, the real economic iniquity of central bank driven Bubble Finance is that it destroys all the pricing signals that are essential to financial discipline on both ends of the Acela Corridor. And as quaint at it may sound, discipline is the sine qua non of long-term stability and sustainable gains in productivity, living standards and real wealth.

The pols of the Imperial City should be petrified, therefore, by the prospect of borrowing $1.2 trillion during the upcoming fiscal year (FY 2019) at a rate of 6.o% of GDP during month #111 through month #123 of the business expansion; and doing so at the very time the central bank is pivoting to an unprecedented spell of QT (quantitative tightening), involving the disgorgement of up to $2 trillion of its elephantine balance sheet back into the bond market.

Even as a matter of economics 101, the forthcoming $1.8 trillion of combined bond supply from the sales of the US Treasury ($1.2 trillion) and the QT-disgorgement of the Fed ($600 billion) is self-evidently enough to monkey-hammer the existing supply/demand balances, and thereby send yields soaring.

…click on the above link to read the rest of the article…

The Fascinating Psychology of Blowoff Tops

January 15, 2018

The Fascinating Psychology of Blowoff Tops

Central banks have guaranteed a bubble collapse is the only possible output of the system they’ve created.

The psychology of blowoff tops in asset bubbles is fascinating: let’s start with the first requirement of a move qualifying as a blowoff top, which is the vast majority of participants deny the move is a blowoff top.

Exhibit 1: a chart of the Dow Jones Industrial Average (DJ-30):

Is there any other description of this parabolic ascent other than “blowoff top” that isn’t absurdly misleading? Can anyone claim this is just a typical Bull market? There is nothing even remotely typical about the record RSI (relative strength index), record Bull-Bear ratio, and so on, especially after a near-record run of 9 years.

The few who do grudgingly acknowledge this parabolic move might be a blowoff top are positive that it has many more months to run. This is the second requirement of qualifying as a blowoff top: the widespread confidence that the Bull advance has years more to run, and if not years, then many months.

In the 1999 dot-com blowoff top, participants believed the Internet would grow at phenomenal rates for years to come, and thus the parabolic move higher was fully rational.

In the housing bubble’s 2006-07 blowoff top, a variety of justifications of soaring valuations and frantic flipping were accepted as self-evident.

In the present blowoff top, the received wisdom holds that global growth is just getting started, and corporate profits will soar in 2018. Therefore current sky-high valuations are not just rational, they clearly have plenty of room to rise much higher.

…click on the above link to read the rest of the article…

Bitcoin isn’t the bubble — the global financial system is

January 8, 2018

Bitcoin isn’t the bubble — the global financial system is

Pretty much every article you read about bitcoin in the mainstream press ends up in the same place. You may not hear it until the seventh or eighth paragraph, but eventually you’ll be told that the whole thing is nothing more than a modern day “tulip bubble.” The more creative types will also throw around the South Sea or Mississippi Bubble. You get the point. The consensus among the very smart experts is unanimous: bitcoin is clearly and indisputably a gigantic bubble that’s set to burst. I’ve been hearing this since the early days of getting involved in the space back in 2012. But I’m not convinced.

For one thing, bubbles don’t do what bitcoin has done since its inception in 2009. During my 10-year tenure on Wall Street, I saw several bubbles grow and then burst, and one thing you learn is that an actual bubble rises like crazy and then totally pops. It doesn’t come right back a couple of years later and soar again to a new price 10 times greater than the previous bubble’s high, which is what bitcoin has done after each one of its three or four previous “bubbles” burst.

That’s not a bubble, but something else entirely.

Let’s take the oil price in the middle of the last decade as an example of a real bubble. The price went on a historic and seemingly unstoppable run all the way to $150 per barrel in 2008. It then proceeded to burst in spectacular fashion just ahead of the financial crisis, plunging all the way back to $30 before rebounding. Ten years later and the price is still nowhere near that prior high, with it currently trading around $60. That’s what happens when a real bonafide bubble bursts. It stays below the prior high for decade at least, sometimes forever. The behavior of bitcoin since the “genesis block” has been completely different.

…click on the above link to read the rest of the article…

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