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During the 40 months after Alan Greenspan’s infamous “irrational exuberance” speech in December 1996, the NASDAQ 100 index rose from 830 to 4585 or by 450%. But the perma-bulls said not to worry: This time is different—-it’s a new age of technology miracles that will change the laws of finance.

It wasn’t. The market cracked in April 2000 and did not stop plunging until the NASDAQ 100 index hit 815 in early October 2002. During those a heart-stopping 30 months of free-fall, all the gains of the tech boom were wiped out in an 84% collapse of the index. Overall, the market value of household equities sank from $10.0 trillion to $4.8 trillion—-a wipeout from which millions of baby boom households have never recovered.

Likewise, the second Greenspan housing and credit boom generated a similar round trip of bubble inflation and collapse. During the 57 months after the October 2002 bottom, the Russell 2000 (RUT) climbed the proverbial wall-of-worry—-rising from 340 to 850 or by 2.5X.

And this time was also held to be different because, purportedly, the art of central banking had been perfected in what Bernanke was pleased to call the “Great Moderation”. Taking the cue, Wall Street dubbed it the Goldilocks Economy—-meaning a macroeconomic environment so stable, productive and balanced that it would never again be vulnerable to a recessionary contraction and the resulting plunge in corporate profits and stock prices.

Wrong again!

During the 20 months from the July 2007 peak to the March 2009 bottom, the RUT gave it all back. And we mean every bit of it—-as the index bottomed 60% lower at 340. This time the value of household equities plunged by $6 trillion, and still millions more baby-boomers were carried out of the casino on their shields never to return.

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

The Inescapable Reason Why the Financial System Will Fail

December 30, 2017

girardatlarge.com

The Inescapable Reason Why the Financial System Will Fail

Credit cannot expand faster than fundamentals forever

Modern finance has many complex moving parts, and this complexity masks its inner simplicity.

Let’s break down the core dynamics of the current financial system.

The Core Dynamic of the “Recovery” and Asset Bubbles: Credit

Credit is the foundation of the current financial system, for credit enables consumers to bring consumption forward, that is, buy more stuff today than they could buy with the cash they have on hand, in exchange for promising to pay principal and interest with their future income.

Credit also enables speculators to buy more assets than they otherwise could were they limited to cash on hand.

Buying goods, services and assets with credit appears to be a good thing: consumers get to enjoy more stuff without having to scrimp and save up income, and investors/speculators can reap more income from owning more assets.

But all goods/services and assets are not equal, and all credit is not equal.

There is an opportunity cost to any loan (i.e. credit), as the income that will be devoted to paying principal and interest in the future could have been devoted to some other use or investment.

So borrowing money to purchase a product or an asset now means foregoing some future purchase.

While all products have some sort of payoff, the payoffs are not equal. If I buy five bottles of $100/bottle champagne and throw a party, the payoff is in the heady moments of celebration. If I buy a table saw for $500, that tool has the potential to help me make additional income for years or even decades to come.

If I’m making money with the table saw, I can pay the debt service out of my new earnings.

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

The Great Oil Swindle

December 16, 2017

silentera.com

The Great Oil Swindle

Is leading us to destruction

When it comes to the story we’re being told about America’s rosy oil prospects, we’re being swindled.

At its core, the swindle is this: The shale industry’s oil production forecasts are vastly overstated.

Swindle: Noun – A fraudulent scheme or action.

And the swindle is not just affecting the US. It’s badly distorted everything from current geopolitics to future oil forecasts.

The false conclusions the world is drawing as a result of the self-deception and outright lies we’re being told is putting our future prosperity in major jeopardy. Policy makers and ordinary citizens alike have been misled, and everyone — everyone — is unprepared for the inevitable and massive coming oil price shock.

An Oil Price Spike Would Burst The ‘Everything Bubble’

Our thesis at Peak Prosperity is that the world’s equity and bond markets are enormous financial bubbles in search of a pin. Sadly, history shows there’s nothing quite as sharp and terminal to these sorts of bubbles as a rapid spike in the price of oil.

And we see a huge price spike on the way.

As a reminder, bubbles exist when asset prices rise beyond what incomes can sustain. Greece is a prime recent example. In 2008 when the price of oil spiked to $147/bbl, Greece could no longer afford imported oil. But oil is a necessity so it was bought anyway, their national balances of payments were stressed to the point that they were exposed as insolvent and then their debt bubble promptly and predictably popped. The rest is history. Greece is now a nation of ruins and their economy might as well be displayed alongside the Acropolis.

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

What Causes Asset Bubbles?

December 13, 2017

What Causes Asset Bubbles?

As we showed yesterday, the price of bitcoin has finally surpassed “Tulips” in the global bubble race.

Overnight the former Bridgewater analysts Howard Wang and Robert Wu, who make up Convoy Investments, released their thoughts on what happens next… and most importantly, what causes asset bubbles…

When we see a dramatic rise in asset prices, there is often an internal struggle between the two types of investors within us.

The first is the value investor, “is this investment getting too expensive?”

The second is the momentum investor, “am I missing out on a trend?”

I believe the balance of these two approaches, both within ourselves and across a market, ultimately determines the propensity for bubble-like behavior. When there is a new or rapidly evolving market, our conviction in the value investor can weaken and the momentum investor can take over. Other markets that structurally lack a basis for valuation are even more susceptible to momentum swings because the main indicator of future value is the market’s perception of recent value. In this commentary, I quantify the balance of value vs. momentum in a market to explore how that tug of war can result in incredible asset bubbles.

The balance of value vs. momentum determines a market’s serial correlation

I believe the outcome of the tug of war between value and momentum in any market can be largely captured by a statistical measure called serial correlation – how likely is the recent past to determine the near future? A value of -1 means future returns are the exact opposite of recent past returns, a value of 0 means they are independent of each other, and a value of 1 means recent past returns are perfectly predictive future returns. After a dramatic price change, value investing would generally expect a reversion to the mean, suggesting a negative serial correlation.

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

Three Bubbles/Strikes and You’re Out

December 12, 2017

Three Bubbles/Strikes and You’re Out

Those betting on a fourth bubble of even greater extremes will find their time at bat has come to an end.

The conventional investment wisdom holds that central banks will never let markets decline. This is an interesting belief, given that two previous asset bubbles based on central bank “easy money” both imploded, impoverishing believers in central bank omnipotence.

So perhaps we can say that the conventional investment wisdom holds that any asset bubble that bursts will quickly be reflated into an even more extreme asset bubble. That’s certainly been the history of the past 17 years.

But there’s a case to be made that bubbles are like strikes, and you only get three. A recent article, Deutsche: “We Are Almost At The Point Beyond Which There Will Be No More Bubbles”, made a nuanced case for “3 bubbles and you’re out” based on volatility and other inputs.

I propose a much simpler case for “3 bubbles and you’re out”:

1. Every policy yields diminishing returns as the positive results follow an S-curve.

2. What every trader knows no longer has any predictive power.

3. Policy extremes have become normalized, leaving central banks with unintended and unpredictable consequences should they push even more extreme policies in the next bubble burst.

Radical new central bank policies work wonders in the initial boost phase (see diagram below) because the sums being deployed are so large and the policy is so extreme: quantitative easing / purchase of assets by central banks, for example: never before have central banks conjured trillions of dollars, yuan, yen and euros out of thin air and used this new currency to buy bonds, stocks and debt instruments in vast quantities for eight years running.

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

The Asymmetry of Bubbles: the Status Quo and Bitcoin

November 30, 2017

The Asymmetry of Bubbles: the Status Quo and Bitcoin

Shall we compare the damage that will be done when all these bubbles pop?

Regardless of one’s own views about bitcoin/cryptocurrency, what is truly remarkable is the asymmetry that is applied to questioning the status quo and bitcoin. As I noted yesterday, everyone seems just fine with throwing away $20 billion in electricity annually in the U.S. alone to keep hundreds of millions of gadgets in stand-by mode, but the electrical consumption of bitcoin is “shocking,” “ridiculous,” etc.

Since the U.S. consumes about 20% of the world’s energy, we can guesstimate the total amount of electricity wasted on stand-by and similar sources of waste is more on the order of $100 billion annually.

What’s shocking and ridiculous is that upwards of $100 billion in electricity is squandered globally annually on stand-by devices and other painfully obvious sources of waste. But this attracts essentially zero concern or commentary. Do you notice any asymmetry in the scrutiny being applied to the status quo and to bitcoin et al.? The status quo– wasteful beyond measure–is just fine: nobody questions the staggering waste built into the status quo, from hundreds of millions of devices consuming electricity but doing no work to hundreds of millions of vehicles idling in traffic for hours each and every day across the globe–nope, the really big issue is bitcoin / blockchain consumption.

Does anyone question how much electricity the vast server farms of Google and Facebook consume in order to serve up adverts and store photos of puppies and kittens? And how about the energy consumed by the NSA and the dozens of National Security agencies that have proliferated over the past 16 years? How much coal gets burned to serve adverts, archive photos of puppies and kittens, and store billions of emails, phone calls to Aunt Sadie, etc. for future analysis?

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

What Could Go Wrong?

November 6, 2017

What Could Go Wrong?

Everybody and his uncle, and his uncle’s mother’s uncle, believes that the stock markets will be zooming to new record highs this week, and probably so, because it is the time of year to fatten up, just as the Thanksgiving turkeys are happily fattening up — prior to their mass slaughter.

President Trump’s new Federal Reserve chair, Jerome “Jay” Powell, “a low interest-rate kind of guy,” was obviously picked because he is Janet Yellen minus testicles, the grayest of gray go-along Fed go-fers, going about his life-long errand-boy duties in the thickets of financial lawyerdom like a bustling little rodent girdling the trunks of every living shrub on behalf of the asset-stripping business that is private equity (eight years with the Deep State-ish Carlyle Group) while subsisting on the rich insect life in the leaf litter below his busy little paws.

Powell’s contribution to the discourse of finance was his famous utterance that the lack of inflation is “kind of a mystery.” Oh, yes, indeed, a riddle wrapped in an enigma inside a mystery dropped in a doggie bag with half a pastrami sandwich. Unless you consider that all the “money” pumped out of the Fed and the world’s other central banks flows through a hose to only two destinations: the bond and stock markets, where this hot-air-like “money” inflates zeppelin-sized bubbles that have no relation to on-the-ground economies where real people have to make things and trade things.

Powell might have gone a bit further and declared contemporary finance itself “a mystery,” because it has been engineered deliberately so by the equivalent of stage magicians devising ever more astounding ruses, deceptions, and mis-directions as they enjoy sure-thing revenue streams their magic tricks generate. This is vulgarly known as “the rich getting richer.”

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

What Could Pop The Everything Bubble?

October 28, 2017

What Could Pop The Everything Bubble?

A crisis that can’t be solved by just printing more dollars

I’ve long held that if a problem can be solved by creating $1 trillion out of thin air and buying a raft of assets with that $1 trillion, then central banks will solve the problem by creating the $1 trillion out of thin air—nothing could be easier.

This is the lesson of the past eight years: if a problem can be solved by creating new money and buying assets, then central banks will solve that problem.

Problem: stock market is declining. Solution: create new money and buy, buy, buy stock index funds. Problem solved! Market stops falling and quickly rebounds as “central banks have our backs.”

Problem: interest rates are inhibiting lending and growth. Solution: create a few trillion units of currency and buy enough sovereign bonds to drop interest rates to near-zero.

Problem: nobody’s left who can afford to buy the new nosebleed-priced flats that underpin China’s miracle-grow economy. Solution: create new currency, lend it to local government agencies who then buy the empty flats.

Problem: stagnant employment and deflation. Solution: create a trillion in new currency, buy a trillion in new government bonds that then fund infrastructure projects, i.e. bridges to nowhere.

And so on. Any problem that can be solved by creating a few trillion out of thin air and buying assets will be solved. The mechanism to solve these problems—creating currency out of nothing—is like a perpetual motion machine: there are no intrinsic limits on the amount of new money that can created at near-zero interest, as the interest payments can be funded by new money.

Even better, the central bank (the Federal Reserve) buys Treasury bonds with the new currency that generate income, which is then returned to the Treasury: a perpetual-motion money machine!

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

Weekly Commentary: Arms Race in Bubbles

October 21, 2017

Weekly Commentary: Arms Race in Bubbles

The week left me with an uneasy feeling. There were a number of articles noting the 30-year anniversary of the 1987 stock market crash. I spent “Black Monday” staring at a Telerate monitor as a treasury analyst at Toyota’s US headquarters in Southern California. If I wasn’t completely in love with the markets and macro analysis by that morning, there was no doubt about it by bedtime. Enthralling.

As writers noted this week, there were post-’87 crash economic depression worries. In hindsight, those fears were misplaced. Excesses had not progressed over years to the point of causing deep financial and economic structural maladjustment. Looking back today, 1987 was much more the beginning of a secular financial boom rather than the end. The crash offered a signal – a warning that went unheeded. Disregarding warnings has been in a stable trend now for three decades.

Alan Greenspan’s assurances of ample liquidity – and the Fed and global central bankers’ crisis-prevention efforts for some time following the crash – ensured fledgling financial excesses bounced right back and various Bubbles hardly missed a beat. Importantly, financial innovation and speculation accelerated momentously. Wall Street had been emboldened – and would be repeatedly.

The crash also marked the genesis of government intervention in the markets that would evolve into the previously unimaginable: negative short-term rates, manipulated bond yields, central bank support throughout the securities markets, Trillions upon Trillions of central bank monetization and the perception of open-ended securities market liquidity backstops around the globe. Greenspan was the forefather of the powerful trifecta: Team Bernanke, Kuroda and Draghi. Ask the bond market back in 1987 to contemplate massive government deficit spending concurrent with near zero global sovereign yields – the response would have been “inconceivable.”

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

Bubble-nomics

October 17, 2017

Bubble-nomics

Question: What is a bubble?

Answer: A bubble is trade in an asset at a price range that strongly exceeds the asset’s intrinsic value. Or it could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

Question: How do you know when you are in a bubble?
Answer: Gauge asset prices against a standard, foundational premise to determine if the price appreciation is warranted.

Lucky for us, the Federal Reserve provides exactly what is needed to show how unjustifiable current prices are against households disposable income. The chart below is all US household’s net worth (current value of all real estate, stocks, bonds, etc.) as a percentage of their disposable personal income (disposable income is what they have left to spend or save after paying their taxes). To round out the picture, I’ve added in the net growth in full time workers during each period, dramatically decelerating.

Since 1970, every time asset values have risen above 520% of households disposable income (the dashed line in the chart) then the US has been in a bubble and a subsequent crash has followed. This has simply meant asset values growing much faster than households income or households capability to sustain those price increases. The depth of each crash has been relative to the overshoot of asset values on the upside.

Why???

I hear much discussion that the millennials are the largest age group in US history and are expected to drive growth in demand. However, most people fail to understand what this truly means. The millennials are just marginally larger than the boomers but what this truly means is zero growth. The millennials are just meeting the previous high water mark the boomers set. When the boomers came through, they nearly doubled the previous high water mark.

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

Too Good For Too Long

October 13, 2017

Shutterstock

Too Good For Too Long

Over-extended systems contract quickly & violently

It’s amazing how instantly the status quo where I live has changed. The world my neighbors and I lived in when we all went to bed on Sunday night simply no longer existed by the time we woke up on Monday morning. Lives have been lost. Entire neighborhoods — thousands of homes — have burned to the ground. Businesses, hospitals and schools are now shuttered.

Having now experienced this personally — on top of watching news reports over the previous weeks of similarly abrupt “before/after” transitions in Houston, Florida, Puerto Rico, Mexico City, Las Vegas and Catalonia — I have a new-found appreciation for the maxim that when it arrives, change happens quickly — usually much more quickly than folks ever imagined, catching the general public off-guard and unprepared.

We humans tend to think linearly and comparatively. In other words, we usually assume the near future will look a lot like the recent past. And it does much of the time.

But other times it doesn’t. And that’s where the danger lies.

The Cruel Math

In 1987 a Danish physicist named Per Bak released a landmark paper introducing the concept of self-organized criticality. Bak observed that complex systems draw stability through an ongoing cycle of corrective collapses that keep the overall system from becoming too over-extended.

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

Schäuble Warns of Coming Economic Crisis

October 12, 2017

Schäuble Warns of Coming Economic Crisis

The 5 Biggest Bubbles In Markets Today

October 9, 2017

The 5 Biggest Bubbles In Markets Today

Bubbles aren’t new—they’ve been around since Dutch tulips—but it’s only recently that they’ve worked their way into the average investor’s lexicon. That’s probably because bubbles happen much more frequently these days.

We never used to get a giant speculative bubble every 7–8 years. But that has been the case since the new millennia.

In 2000, we had the dot-com bubble.

In 2007, we had the housing bubble.

In 2017, we have the everything bubble.

Why do we call it the everything bubble? Well, there is a bubble in a bunch of asset classes simultaneously (I delve deeper into this topic in my free exclusive special report, Investing in the Age of the Everything Bubble).

Let’s look at some of them.

Real Estate

You can spot real estate bubbles all around the world now. Canada, Australia, Sweden, Hong Kong, China—and California—to name a few.

Home prices in California have risen by 69% since 2010. Meanwhile, Canadian housing has shot up 1040% over the same period.

Why do these bubbles exist? For starters, ultra-loose monetary policy (which is also the reason that the bitcoin bubble exists).

What will be the catalysts that deflate these real estate bubbles? I’m not sure, but usually there isn’t a catalyst. The marginal house price just gets too expensive.

It seems pretty nutty that another real estate bubble is forming just ten years after the last one that nearly wiped out the planet. But real estate has been part of the food fight in asset prices and it appears to be peaking.

Cryptocurrencies

You have probably heard about the madness in cryptocurrencies, like Bitcoin, Ethereum, and ripple. Ethereum is up about 3,600% this year. As for bitcoin, it is old and boring and up only 343% this year.

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

Schäuble: Another Financial Crisis Is Coming Due To Spiraling Global Debt, “New Bubbles”

October 8, 2017

Schäuble: Another Financial Crisis Is Coming Due To Spiraling Global Debt, “New Bubbles”

Following the disappointing for Angela Merkel and her CDU German election results, which propelled the populist AfD into Germany’s political establishment with 92 members of parliament, the first casualty was Germany’s finance minister, Wolfgang Schäuble, who in a few days will relinquish his long-held post and move on to the ceremonial role of Bundestag president. As part of his farewell tour, Schäuble – like so many other former members of the establishment- took a parting shot at the system he helped create and warned that “spiraling levels of global debt and liquidity”, as well as “new bubbles” present a major risk to the world economy.

Speaking to the FT, the Europhile beloved in Germany for successfully steering one of the world’s largest economies for the past eight years, and who nearly led to Grexit in the summer of 2005, said there was a danger of “new bubbles” forming due to the trillions of dollars that central banks have pumped into markets. Confirming another fear widely propagated by the Putin propaganda alternative media, Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of non-performing loans, something we have warned about since 2012, and an issue which remains largely unresolved.

A strong advocate of fiscal rectitude and debt reduction, Mr Schäuble dominated Europe’s policy response to the eurozone debt crisis and has been vilified in countries such as Greece as an architect of austerity. But he will mainly be remembered as the most ardently pro-European politician in German chancellor Angela Merkel’s cabinet, skilled at selling the benefits of the euro and of deeper European integration to an often sceptical German public.

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

An Accountant Smells a Rat – Peter Diekmeyer

October 2, 2017

An Accountant Smells a Rat – Peter Diekmeyer

Twenty years ago Doug Noland was so worried about imbalances surrounding the dot.com boom that he began to title his weekly reports “The Credit Bubble Bulletin. Years later, he warned the world about the impending 2008 crisis.

However a coming implosion, he says, could be the biggest yet.

“We are in a global finance bubble, which I call the grand-daddy of all bubbles,” said Noland. “Economists can’t see it. They can’t model money and credit. However, to those outside the system, the facts are increasingly clear.”

Noland points to inflating real estate, bond and equity prices as key causes for concern. According to the Federal Reserve’s September Z.1 Flow of Funds report, the value of US equities jumped $1.5 trillion during the second quarter to $42.2 trillion, a record 219% of GDP.

Noland’s Credit Bubble thesis

Noland may be right. A report by the International Institute of Finance released in June estimated that global government, business and personal debts totaled $217 trillion earlier this year. That’s more than three times (327%) higher than global economic output.

Adding to the complexity is the fact that not all debts are fully recorded. For example, according to a World Economic Forum study, the world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to experience a $224 trillion funding shortfall by 2050.

Noland’s warnings come during a time of exceptional public trust in governments, central banks, regulators and other institutions. Market volatility is trending at near record lows.

In June, Federal Reserve Chair Janet Yellen spoke for many when she said that she did not see a financial crisis occurring “in our lifetimes.”

Unburdened by “econometrics groupthink”

So why would Noland, who during his day job runs a tactical short book at McAlvany Wealth Management, see things that government, academic, and central bank economists don’t?

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

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