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Prelude to Crisis
Prelude to Crisis
“The Federal Reserve is running the risk of fomenting an eventual financial crisis by easing banking regulations at the same time that it’s cut interest rates…say some former Fed officials, including ex-Vice Chairman Alan Blinder and financial stability experts Daniel Tarullo and Nellie Liang.”
– Bloomberg article on December 17th, 2019
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INTRODUCTION
When we published the first edition of our Bubble 3.0 series in December 2017, the S&P 500 had ballooned to then-record-highs. Most pundits at the time turned a blind eye to some of the more concerning aspects of the market, and our view of a pending implosion was very much in the minority. Fast-forwarding a few quarters, and several corners of the market that looked unstoppable in late-2017 did in fact collapse. The poster child for the flushing out that we forewarned about was Bitcoin, whose price fell from nearly $20,000 to just over $3,000 in less than twelve months.
But the fringe investment that gained incredible steam at the end of 2017 wasn’t the only corner of the market to melt down in less than a year. The S&P 500 also fell by almost 20% toward the end of 2018, teetering on the cusp of – and barely avoiding – the first bear market in nearly a decade.
It was at this point that we encouraged readers to begin methodically accumulating shares of high-quality companies. As most market observers are aware, the US stock market reversed course soon after, breaking through several key resistance points and reaching new highs time and time again over the course of the last twelve months. This happened despite escalating conflict in the Middle East, ballooning corporate and sovereign debt, the impeachment of President Donald Trump, global fears of a widespread coronavirus outbreak, and deepening tensions amongst some of the world’s most influential and well-armed superpowers.
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Taking the Hard Way Out
TAKING THE HARD WAY OUT
“You don’t make mistakes when you don’t have money. When you have too much money, you will make a lot of mistakes.”
– Jack Ma, founder of Alibaba, the Amazon of China
“My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists…or that God doesn’t exist…Well, that’s exactly the way I think it is with gold. Either you’re a believer or you’re not.”
– Howard Marks, founder of OakMark, whose newsletter Warren Buffett reads “religiously”
“Because of Paul Volcker, our financial system is safer and stronger. I’ll remember Paul for his consummate wisdom, untethered honesty, and a level of dignity that matched his towering stature.”
– Barack Obama
“Every penny of QE undertaken by the Fed that cannot be unwound is monetized debt.”
– CNBC regular and former senior advisor to the president of the Dallas Fed, Danielle DiMartino Booth
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SUMMARY
- Interest rates and inflation couldn’t be more different today than they were in the 1970s.
- One of the shocking surprises of the last decade is that despite ultra-low, zero, or, even, negative interest rates inflation has generally fallen rather than risen.
- Yet, when it comes to asset prices (US stocks, global bonds, and real estate), it has been a completely different story.
- One asset class that hasn’t risen as swiftly as others is gold and other precious metals.
- This underperformance has caused most American investors—be they retail or institutional—to give up on precious metals as an essential asset class.
- However, John Hathaway, who is considered to be the “Warren Buffett of the precious metals space,” is much more bullish given all of the macro-economic factors at play.
- In the short-term, John and top economist David Rosenberg anticipate we could have a recession in 2020.
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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.
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Not Modern, Not About Money, and Not Really Much of a Theory
NOT MODERN, NOT ABOUT MONEY, AND NOT REALLY MUCH OF A THEORY
“Ignoring MMT’s rising popularity would be about as smart (and effective) as a dog barking at the waves in the ocean.”
–KEVIN MUIR, author of the avant garde financial newsletter, The Macro Tourist
“I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die. This is now true for capitalism.”
–RAY DALIO, founder of hedge fund behemoth, Bridgewater Associates
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INTRODUCTION
The final lap. It’s hard to believe that as recently as February, when I first brought up the concept of a new economic model that was poised to radically alter the world we’re living in, MMT was as obscure as an extra in an old Cecil B. DeMille bible film. Yet, a mere two months later, you have to try extremely hard to ignore Modern Monetary Theory and its swelling number of disciples.
Perhaps at this point, some of you who have read the three previous installments of our month-long series on MMT wish I’d never brought it your attention. You might even think it’s such a zany idea that it will never see the light of day. If so, you could be right—but I doubt it.
Prior issues of this series have made the point that ultra-low and, even, negative interest rates have led to a boom in asset prices at the expense of the real economy. This has created the most lop-sided income distortion since 1929.
Source: Grant Williams, TTMYGH (2/10/2019)
Even after 10 years of a long and sluggish expansion—which happily has driven unemployment down to 50-year lows–there is an unmistakable whiff of outrage in the air. The non-1% or, perhaps more accurately, the non-5%, are coming to believe they’ve been stiffed by the reality revealed in the above chart.
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Bubble 3.0: No Way Out
BUBBLE 3.0: NO WAY OUT
“We’re paddling against the current in trying to sustain public faith in the Fed.”
–Federal Reserve Chairman JEROME (JAY) POWELL
“The FOMC (Federal Open Market Committee, the Fed’s key rate-setting entity) is in panic mode now, facing the Frankenstein monster balance sheet it has created. The FOMC has come to the realization that it cannot unwind it.”
–Jones Trading’s chief strategist MIKE O’ROURKE
“The Fed today is as much a prisoner of the market as the market today is a prisoner of the Fed.”
–Epsilon Theory’s BEN HUNT
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INTRODUCTION
At the beginning of 2018, we initiated a new EVA series titled “Bubble 3.0” with excerpts from David Hay’s upcoming book titled “Bubble 3.0: How Central Banks Created the Next Financial Crisis”.
If you are just joining us in the middle of this ongoing series, which will eventually culminate in a full-length publication, please take a few moments to review the prior installments in the series:
- Bubble Watch: A New Series Dedicated to Investors Interested in Preserving Their Wealth(December 22, 2017)
- Biggest Bubble Ever Quarterly Webinar (February 9, 2018)
- Bubble 3.0: How Central Banks Created the Next Financial Crisis (April 27, 2018)
- Bubble 3.0: How Did We Get Here? (Part I) (June 1, 2018)
- Bubble 3.0: How Did We Get Here? (Part II) (June 8, 2018)
- Bubble 3.0: A Fast and Furious Challenge (July 6, 2018)
- Bubble 3.0: Up from the Ashes (August 24, 2018)
- Bubble 3.0: The Biggest Bubble Inside the Biggest Bubble Ever (September 21, 2018)
- Bubble 3.0: What Could Go Right (October 12, 2018)
- Bubble 3.0: The Upside of Downside (November 30, 2018)
- Special Edition EVA: The Stealth Bear Market (December 14, 2018)
- Bubble 3.0: What Price Prosperity? (Part I) (January 11, 2019)
- Bubble 3.0: What Price Prosperity? (Part II) (January 18, 2019)
In this month’s edition, David looks at how a recent policy pivot from the Fed could create a longer-term crisis with no way out for the US economy or stock market.
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BUBBLE 3.0, CHAPTER 10: NO WAY OUT
“Big hat, no cattle”. “All sizzle, no steak”. “Talks a good game”. Those and other popular sound-bites are meant to refer to someone who is, to use another colloquialism, “all bark and no bite”. When it comes to most of the world’s central banks, all of those quips apply.
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