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Bubble 3.0: A Blast From a Bubble Past

BUBBLE 3.0: A BLAST FROM A BUBBLE PAST

“Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come.”
–BEN BERNANKE, Former Fed Chairman in a March 20, 2006 speech

“It was popular to play down the significance of the inverted yield curve in 2000 and 2006, but on both occasions, the bond market’s warning was eventually vindicated.”
The Long View column in the Financial Times, March 30th and 31st, 2019

“Nothing sedates rationality like large doses of effortless money.”
–WARREN BUFFETT

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SUMMARY

  • The tech bubble in the late 1990s set off a chain of events that led to Bubble 2.0 in the mid-2000s, and the bubble in which we presently find ourselves
  • Recent IPOs such as Uber, Lyft and Beyond Meat underscore the rank speculation of securities valued on considerations other than profits
  • Over 80% of IPOs coming to market currently are earnings-free, the highest rate since 2000
  • One major divergence from Bubble 1.0 is that many outrageous valuations go well beyond tech
  • However, despite this fact, we are living in a two-tiered market where, just like in 2000, there are a multitude of companies that are reasonably valued
  • Additional parallels with Bubble 1.0 are the regulatory attacks on tech, the war then vs the war now, the yield curve and current economic conditions
  • Evergreen’s view is that a simple buy-and-hold approach with an S&P 500 index fund won’t cut it in this environment
  • Just as in 2000, allocating away from bubble-infested parts of today’s stock market is essential, as is selling into rallies and buying into weakness

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BUBBLE 3.0: A BLAST FROM A BUBBLE PAST

Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time. Please see important disclosure following this article. 

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

Peter Schiff: The Bigger the Boom, the Bigger the Bust (Video)

Peter Schiff: The Bigger the Boom, the Bigger the Bust (Video)

During the New Orleans Investment Conference, Peter Schiff participated in a panel discussion with Ben Hunt and Mike Larson. They talked about bubbles, booms and busts.

Hunt called it the “bubble of everything.” But he said the “gravitational force” created by all of the assets central banks have purchased over the last year have changed the “bubble-popping process.” That makes it hard to predict when things will actually start to deflate. He said it will take something the undermines the market confidence that central banks can bail us out. Hunt said inflation was possibly the pin that could prick the bubble.

Larson called it the “uber-bubble,” and he said he already sees some of the background concerns that have been simmering for  a long time are starting to “bubble over.” (Pun intended.) He said the last two bubbles were high in amplitude, but limited to certain parts of the economy (dot-coms and housing). The current bubble isn’t as high in amplitude, but it’s broader-based. We see bubbles in stocks, high-yield bonds, housing (again), and commercial real estate, along with a lot of other assets you don’t hear as much about – such as art and comic books.

I think the process of unwinding this is already beginning.”

Peter focused in on the cause of the bubbles.

When you see rampant, wide-scale bad decisions, generally a central banker is behind it, and they have made a bad decision to create too much money and to artificially manipulate interest rates down.”

This creates distortions in the economy because interest rates are really nothing more than price signals.

And like all prices, they need to be determined by the free market.”

Whenever the government – and central banks are really an extension of governments – price fixes something, it creates big distortions and malinvestments. 

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


Once the Bubbles Pop, We’re Broke

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…

Economic Bubbles Are Leaking. Once They Pop, Game Over

Economic Bubbles Are Leaking. Once They Pop, Game Over

Downtrend In the Growth Rate of Money Supply Poses a Threat to Bubble Activities

The yearly growth rate of real gross domestic product eased to 1.9% in Q4 from 2% in the previous quarter.

Using our large scale econometric model we can suggest that the yearly growth rate of GDP could fall to 1.7% by Q3 before bouncing to 2.4% by Q4. By Q4 next year we forecast also a figure of 2.4%.

Shostak1

Other latest data portrays a mixed picture of economic activity. The yearly growth rate of durable goods orders jumped to 1.8% in January from minus 0.1 in the month before.

Meanwhile the Kansas Fed manufacturing index fell to minus 12 in February from minus 9 in January.

Also, in the housing market there are mixed signals with the yearly growth rate of existing home sales climbing to 11% in January from 7.5% in December while the yearly growth rate of new home sales plunged to minus 5.2% in January from 9.9% in the month before.

Shostak2

Furthermore, Conference Board’s consumer confidence index has weakened in February from January with the index falling to 92.2 from 97.8.

Shostak3

Changes in various indicators by themselves do not provide the information about the underlying reason for these changes. In our writing we have suggested that the key is the state of the pool of real wealth.

We suggest that strong increases in the yearly growth rate of money supply prior to its major peak in October 2011, when the yearly growth rate closed at 14.8%, were instrumental in undermining the pace of real wealth generation.

Since October 2011 the yearly growth rate of our measure of money AMS has been following a choppy declining trend. We hold that this is undermining various bubble activities, which sprang up on the back of past strong monetary rises.

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

$20,000 Gold And The End Of “Pollyanna-ish Do-Goodery”

$20,000 Gold And The End Of “Pollyanna-ish Do-Goodery”

They just won’t let the scales balance… it is a rampant narcissistic megalomania that somehow some guy in a air-conditioned office can best repliacte the free market and centrally plan our affairs… Their starry-eyed pollyanna-ish do-goodery never seems to pan out.

In the flux of never before seen economic uncertainty, Stefan Molyneux and Mike Maloney discuss the difference between currency and money, the historical role of gold as money, the dependence of the United States government on Wall Street for tax revenue, the role of the Federal Reserve in the creation of unstable economic bubbles, the possibility of deflation, $20,000 gold and how you can protect yourself in these uncertain economic times.

Bubbles Always Burst: the Education of an Economist

Bubbles Always Burst: the Education of an Economist

I did not set out to be an economist. In college at the University of Chicago I never took a course in economics or went anywhere near its business school. My interest lay in music and the history of culture. When I left for New York City in 1961, it was to work in publishing along these lines. I had worked served as an assistant to Jerry Kaplan at the Free Press in Chicago, and thought of setting out on my own when the Hungarian literary critic George Lukacs assigned me the English-language rights to his writings. Then, in 1962 when Leon Trotsky’s widow, Natalia Sedova died, Max Shachtman, executor of her estate, assigned me the rights to Trotsky’s writings and archive. But I was unable to interest any house in backing their publication. My future turned out not to lie in publishing other peoples’ work.

My life already had changed abruptly in a single evening. My best friend from Chicago had urged that I look up Terence McCarthy, the father of one of his schoolmates. Terence was a former economist for General Electric and also the author of the “Forgash Plan.” Named for Florida Senator Morris Forgash, it proposed a World Bank for Economic Acceleration with an alternative policy to the existing World Bank – lending in domestic currency for land reform and greater self-sufficiency in food instead of plantation export crops.

My first evening’s visit with him transfixed me with two ideas that have become my life’s work. First was his almost poetic description of the flow of funds through the economic system. He explained why most financial crises historically occurred in the autumn when the crops were moved. Shifts in the Midwestern water level or climatic disruptions in other countries caused periodic droughts, which led to crop failures and drains on the banking system, forcing banks to call in their loans.

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

 

We Need a Crash to Sort the Wheat from the Chaff

We Need a Crash to Sort the Wheat from the Chaff

Once the phantom collateral vanishes, there’s no foundation to support additional debt and leverage.

When a speculator bought a new particle-board-and-paint McMansion in the middle of nowhere in 2007 with nothing down and a $500,000 mortgage, the lender and the buyer both considered the house as $500,000 of collateral. The lender counted the house as a $500,000 asset, and the speculator considered it his lottery ticket in the housing bubble sweepstakes: when (not if) the house leaped to $600,000, the speculator could sell, pay the commission and closing costs and skim the balance as low-risk profit.

But was the house really worth $500,000? That’s the trouble with assets bubbles inflated by central-bank/central-state intervention: when inefficient companies and inflated assets are never allowed to fall/fail, it’s impossible to tell the difference between real collateral and phantom collateral.

The implosion of the housing bubble led to an initial spike of price discovery. The speculator jingle-mailed the ownership of the poorly constructed McMansion to the lender, who ended up selling the home to another speculator who reckoned a 50% discount made the house cheap for $250,000.

But what was the enterprise value of the property, that is, how much revenue, cash flow and net income could the property generate in the open market as a rental? Comparables are worthless in terms of assessing collateral, because assets are mostly phantom collateral at bubble tops.

Let’s assume the enterprise value based on market rents was $150,000. The speculator who bought the house for $250,000 sold for a loss, and at the bottom of the cycle the house finally sold for its true value of $150,000.

Leveraged 20-to-1, the lender’s loss of $250,000 in collateral/capital unhinged $5 million of the lender’s portfolio as the capital supporting those loans vanished.

The first speculator who put nothing down suffered a loss of creditworthiness, and the second speculator lost $100,000 plus commissions when he dumped the property for a loss.

 

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

Bank of Canada Decides More Bubble-Blowing is Needed

Bank of Canada Decides More Bubble-Blowing is Needed

You Can’t Keep the Printing Press Idle for too Long …

We have recently portrayed Canada’s new central bank governor Stephen Poloz, to whom we have alternately referred to as a comedian and a delusional bubble blower. This may perhaps strike some readers as uncharitable; then again, central economic planning bureaucrats should be fair game, especially as nearly all of them are slaves to hoary inflationism and are apodictically certain to do grave damage to the economy, based on economic theories that at best deserve to be called a form of voodoo. It’s really that bad.

0715polozMr. Stephen Poloz, Canada’s new bubble-blower in chief, gazing into the distance – presumably in a futile attempt to divine the future.

Photo credit: Adrian Wyld / The Canadian Press

 

As readers may recall, Mr. Poloz has continued where his fellow bubble-blower and predecessor Mark Carney left off, by keeping the bubble blown with all his might. We imagine he may be a bit intimidated by the truly daunting size the combined real estate and consumer credit bubbles have attained in Canada. To call them monuments to monetary megalomania would be an understatement. Among developed nations, only the bubbles in a few Scandinavian countries and Australia can hold a candle to them.

Surely Poloz must be aware that there can simply be no painless way of getting out of this mess. Hence, he is trying to delay said end, possibly in the hope that the bust can be postponed beyond his watch (Carney showed judicious timing, we think, when jumping off the Canadian ship).

We were therefore decidedly unsurprised when it emerged yesterday that the Bank of Canada has cut rates again – apparently the Canadian economy has entered an official recession, which must however not be mentioned (!).Really.

According to the Financial Post:

 

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

Pop goes the Bubble

Pop goes the Bubble

Running a fundraiser (which, by the way, has been a great success—thank you all very much!) has prompted me to think about money more deeply than I normally do. I am no financial expert, and I certainly can’t give you investment advice, but when I figure something out for myself, it makes me want to share my insights. I know that many people see national finances as an impenetrable fog of numbers and acronyms, which they feel is best left up to financial specialists to interpret for them. But try to see national finances as a henhouse, yourself as a hen, and financial specialists as foxes. Perhaps you should pay a little bit of attention—perhaps a bit more than one would expect from a chicken?

By now many people, even the ones who don’t continuously watch the financial markets, have probably heard that the stock market in the US is in a bubble. Indeed, the price to earnings ratio of stocks is once again scaling the heights previously achieved just twice before: once right before the Black Tuesday event that augured in the Great Depression, and again right around Y2K, when the dot-com bubble burst. On Black Tuesday it was at 30; now it’s at 27.22. Just another 10% is all we need to bring on the next Great Depression! Come on, Americans, you can do it!

These nosebleed-worthy heights are being scaled with an extremely shaky economic environment as a backdrop. If you compensate for the distortions introduced by the US government’s dodgy methodology for measuring inflation, it turns out that the US economy hasn’t grown at all so far this century, but has been shrinking to the tune of 2% a year.

And if you ignore the laughable way the US government computes the unemployment rate, it turns out that the real unemployment rate has grown from 10% at the beginning of the century to around 23% today.

 

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

Who Benefits When Bubbles Burst?

Who Benefits When Bubbles Burst?

Blowing speculative bubbles cannot possibly lead to organic growth because speculative bubbles fatally undermine the real economy.

An astute reader recently posed an insightful question: we all know who benefits from asset bubbles in stocks, bonds and real estate–owners of assets, banks, the government (all those luscious capital gains and rising property taxes), pension funds, brokers and so on. But who benefits from the inevitable collapse of these asset bubbles?

If asset bubbles end badly for virtually every participant, then why does the system go to extremes to inflate them? This is an excellent question, as it goes right to the heart of our dysfunctional Status Quo.

1. The system has no choice left but to blow serial bubbles.Broadly speaking, there are three possible answers:

2. Bubbles are domestic opportunities for Shock Doctrine-type crises that enable further consolidation of power.

3. Those in charge of the Status Quo believe the fantasy that the next bubble will usher in the long-awaited return to organic growth, i.e. expansion that isn’t dependent on central bank stimulus, enormous fiscal deficit spending, ginned-up statistics, etc.

Let’s consider each possible answer more closely.

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

 

 

 

charles hugh smith-Why Living in a Post-Bubble World Is No Fun

charles hugh smith-Why Living in a Post-Bubble World Is No Fun.

What do we do when the bubble economy cannot be reflated?

It is generally conceded that we are living in an era of Peak Everything: peak central bank omnipotence, peak powerless of the non-elites, peak wealth inequality, peak media-induced delusion, peak market-rigging, peak bogus official statistics, peak propaganda, peak bread and circuses, peak deception, peak distraction, peak sociopathology, peak central statism, peak debt, peak leverage, peak derealization–need I go on?

Peaks generate bubbles. Bubbles reach extremes and then they pop. There is nothing mysterious about this causal chain: peaks generate extremes that manifest as bubbles, which eventually implode as extremes revert to the mean and mass delusions are shattered by the unwelcome reality that extremes are not sustainable.

The status quo solution to the devastation of a popped bubble is to inflate another even bigger bubble. If debt reached extremes that imploded, the solution is to expand debt far beyond the levels that caused the implosion.

If fudging the numbers triggered a loss of confidence, the solution is to fudge the numbers even more, so they no longer reflect reality at all.

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

Van Hoisington And The Fed’s Bubble: “Overtrading” And “Discredit” Always End In “Revulsion” | Zero Hedge

Van Hoisington And The Fed’s Bubble: “Overtrading” And “Discredit” Always End In “Revulsion” | Zero Hedge.

Excerpted from Hoisington Investment Management’s Quarterly Outlook,

via Van Hoisington and Lacy Hunt:

The U.S. economy continues to lose momentum despite the Federal Reserve’s use of conventional techniques and numerous experimental measures to spur growth. In the first half of the year, real GDP grew at only a 1.2% annual rate while real per capita GDP increased by a minimal 0.3% annual rate. Such increases are insufficient to raise the standard of living, which, as measured by real median household income, stands at the same level as it did seventeen years ago.

Asset Bubbles

Historically, in our judgment, the most important authority on the subject of asset bubbles was the late MIT professor Charles Kindleberger, author of 20 books including the one of the greatest books on capital markets Manias, Panics and Crashes (1978). He found that asset price bubbles depend on the growth of credit. Atif Mian (Princeton) and Amir Sufi (University of Chicago) provided confirmation for Kindleberger’s pioneering work and expanded on it in their 2014 book House of Debt. Chapter 8, entitled “Debt and Bubbles,” contains the heart of their insights. Mian and Sufi demonstrate that increasing the flow of credit is extremely counterproductive when the fundamental problem is too much debt, and excessive debt can fuel asset bubbles.

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

The IMF and Austrian Theory – Ludwig von Mises Institute Canada

The IMF and Austrian Theory – Ludwig von Mises Institute Canada.

 

IMF Greece Financial CrisisBack in the early 1960s, financial journalist Henry Hazlitt warned against efforts to create an international system to help facilitate the smooth transfer of currencies. Representatives from the world’s leading governments were attempting to increase liquidity in global markets. They wanted to make sure the banking system and sovereign governments would never had a lack of funds. Hazlitt was not fooled. “In plain English” he wrote, “they are pushing for more world inflation.” His words, though accurate, went unheeded. The International Monetary Fund, which was established decades earlier, was to play a role in facilitating endless inflation.

Half a century later, the IMF has overseen a tumultuous business cycle that came to a screeching halt in 2008. Big, overleveraged banks were on the verge of collapsing; millions of people lost their jobs and their homes; governments spent billions of dollars to maintain their welfare safety nets. The end result, which is still ongoing, is stagnant economic growth with dim prospects for recovery.

…click on the above link for the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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