Bubbles are “good”…until they burst…then they are/were not so “good.” Alan Greenspan told us that it is impossible to know when a bubble is forming or if an asset class is even in a bubble. Really? How about using plain old common sense to figure out when something is just too darn expensive? How about listening to the gaggles of fools tell stories about “flipping this” or “flipping that?” If during a conversation with someone who clearly “doesn’t know that they don’t know” you figured out that 2+2 equals anything but 4 in their brain, might your common sense tell you that maybe whatever they are touting is a bubble?
This past week we heard from San Francisco Fed President John Williams says that “Fed policy may unintentionally create asset price bubbles in ways not predicted by economic models.” Really? Unintentionally? In ways not predicted by your models? If you believe Alan Greenspan then your “models” couldn’t predict a bubble anyways since no one can recognize a bubble when it’s staring them in the face! Mr. Williams went on to say, “We need to acknowledge that investors and financial markets do not behave the way rational asset price theory implies.” Rational? How rational is it to lever $60 billion of equity into a $3.6 trillion balance sheet? Maybe my brain’s calculator needs a new battery but these seems like 60-1 leverage to me, forget about “rational,” is this even sane? I could go on and on with the above and it might end up being a humorous writing but when all is said and done, “humor” will be the last adjective to describe what happened.
“Bubbles” as spoken of so often are when an asset class gets out of whack pricewise, generally (almost always) are caused or created by leverage (or margin) and then collapse in price when a whiff of sanity returns. I would suggest that the entire financial system from banks to brokers (both stock and real estate), currencies and debts are in a bubble that started slowly at first and for the last 15-20 years grew more rapidly. We didn’t really notice it did we? We went about our lives and things seemed “normal.” Yes, we did experience a couple of stock bubbles and crashes and real estate pretty much spiked and then collapsed but…oh well, stuff like that happens. Doesn’t it? My point here is that “bubbles” don’t just happen out of the blue, just as a fire needs oxygen, bubbles need money…or more to the point, they require CREDIT!
Which leads me to the real point, we in the West (and now in the East) have created bubble after bubble after bubble that didn’t “just happen.” No, it took credit…LOTS AND LOTS of credit! I would also like to remind you that whether you are talking about Dollars, Euros, Yen, Pounds, Renmimbi or any other currency that us humans use to trade with…they are ALL credit based currencies. You see, in order to create any of these currencies…someone has to BORROW the money first. Yes I know, the actual pieces of paper can be printed and they are but that is “old school” and for true pikers. I say “pikers” because there is no fun (leverage) involved here, we live in a computer age where the stroke of a few keys can create 100’s times more “digital money” in a day than can actually be printed in a year.
THIS is where THE REAL BUBBLE is! The biggest bubble in all of history, (larger than the Tulip mania, South Sea, the Mississippi Bubble, 1929, current global real estate and global stock bubbles combined then cubed) is the current and total global financial system. EVERYTHING EVERYWHERE is based on credit. In fact, over 60% of this “credit” is dollar based and “guaranteed” by the U.S. government. The minor little problem now is that we have reached “debt saturation” levels everywhere. There are no more asset classes left able to take on more credit (air) to inflate the balloon. The other minor detail is that the “asset” that underlies the value of everything (the dollar and thus Treasury securities) is issued by a bankrupt entity. What could possibly go wrong?
Like I said above, it all seemed “normal” and even “good” while the bubble was being inflated because even though the price of food, gas and other “stuff” went up…asset prices went up faster…until they didn’t. It was “good” because we, they, pretty much everyone were able to live “larger” than we could have without credit. I mean think about, who would ever complain about living better than you could really afford to or who would ever suggest that “the good life” is wrong? Almost no one. Certainly not the Fed because no matter what they say, they are central bankers. Their primary job no matter what anyone says is to “inflate”…and they have. They have done such a good job that almost every single investment class today will be viewed in the rear view mirror to have been a bubble. But like Alan Greenspan so eloquently (untruthfully) has said, “Who could have known?” This was said in the aftermath of 2008 and will be leaned on again after the entire house of cards collapses. But…even those who currently don’t even have a clue will be able to see what happened because it is just that obvious.
P.S. For you animal lovers, I came across the coolest video I’ve ever seen! The best dog I ever had was a Golden Retriever which makes me partial to this but “spectacular” doesn’t even come close. I cannot imagine the time spent with this dog…unless she’s just a natural born dancer! Hope you enjoy it.