Reader Bob wants to know if the Fed can keep various bubbles levitated forever. Here is his specific question followed by my response.
Hi Mish,
Thanks for the great website. I read it every day. With the changes in the rules of the Fed from TARP, I have come to question how things will ever change. I believe the Fed will never raise interest rates (of any consequence). I think the Fed will buy assets in any crash in stocks, bonds, real estate, etc.
What if a law required that no real estate be sold for less than 10% of its purchase price? [Mish note: Bob said 10% but I think he means 110%. Alternatively, he does not want homes to sell for more than 110% of the previous sale to stop bubbles. I address both possibilities.]
Is anything wrong with my thinking? Can anything end this? I am an average income guy paying my bills.
Thanks for any insight.
Bob
Attitudes
Can this go on forever? That’s a question I get asked all the time.
Many seem to think so. The same attitude prevailed in 1929, 2000, 2007, and 2017. That’s 3 bubbles in 17 years. Each bubble is of bigger amplitude.
No one thought Japanese stocks could or would fall from 39,000 to 7,000 over 20 years but that happened. Could we see the same in the US? Why not?
Central Banks Omnipotent?
If central banks were omnipotent there would not have been a crash in Japan. If central banks were omnipotent there would not have been a global crash in 2000 or 2007.
Can central banks prevent crashes or declines forever? History says no. Does QE make things any different? Why? Is the Fed going to own everything?
I am sure the Fed will not own everything. Will another round of bond buying ignite the markets again? Why would it?
Market Timing
Yet, I have not provided any insight as to when this ends. I cannot. Nor can anyone else. Conventional wisdom says “you cannot time the market”. Arguably that’s true.
But history also says overpaying for assets will eventually set someone back for years, perhaps decades. Look at Japan. Even in the US there are good times to buy and poor times to buy.
2000 and 2007 were exceptionally poor times to buy in the US. In the US, normalized P/Es suggested 1998, 2005, and 2015 were poor times to buy. The stock market went up anyway, in all three instances.
Those investing in 1998 got two more years of mania. So did those in 2005. So did those in 2015. Might we see two more years of mania? Sure, why not? But history also says it will all be taken back and much more.
Fair market value on the S&P 500 is probably in the range of 1200 to 1400. That’s a long way down.
Don’t Overrule Free Markets
As for your suggestion on real estate, please don’t go there. The distortions would be perverse in unpredictable ways. If rules mandate people must pay more than they believe homes are worth, there will be no sales.
If you mean people could not bid more than 10% above the previous price (to stop bubbles from growing), one of two things might happen
One possibility would be Joe sells to Sue who sells to Mark who sells to Jim in house flipping schemes to drive up prices before the final sale to a “real” buyer.
Another possibility is no sales take place at all as people view their asset as worth more than they can get.
We are in this mess because the Central Bank wizards believe they know where interest rates should be. Three bubbles in 17 years prove central bankers are clueless.
When does the mania end? I don’t know, nor does anyone else. But it will.
Mike “Mish” Shedlock
We are in this mess because obama and the democrsts wanted to retain power.
Rather have a recession we got:
Zero interest rates
Bailout of all banks and wall street firms despite their reckless behavior
Bailout of car companies and their unions despite their reckless behavior
Lowering and lowering of borrowing standards
The nationalizing of the mortgage market
Ignoring of centuries of contract law
Ignore GAAP rules and procedures
Not one banker or major wall street banker in jail
An Attorney General who refused to even investigate financial fraud
Adding more to the debt than ALL previous administrations COMBINED and accounting for inflation
Etc.
The real question is how could there not be a plethora of bubbles???
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no.
this started WAY before obama.
try reagan and bush 1 (maybe) and clinton and bush 2 and obama.
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Ummm, try LBJ and his asinine wars on vietnam, poverty, drugs, and everything else.
LBJ was the con-artist who “privatized” FNMA/FHLMC to create the illusion that he had balanced the national budget. It would be called fraud if any private sector entity had done this.
Several presidents before LBJ had pulled some fast ones, but LBJ’s budget was the first to include outright fraud.
And being fair, Nelson Rockefeller started the government acounting fraud game in NY state by selling the NY State Thruway system to a Thruway “authority” controlled by the same state. It was a special purpose financing vehicle used by government decades before Enron did it.
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Earlier. When Nixon pulled us of the gold standard because government could not live within our means. That was caused by Johnson creating the welfare state. Beginning of the great giveaway.
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No, the slide started because our economy had peaked. After that it was always going down. All the argy bargy since then has been to hide the change. The US could afford LBJ’s welfare state. but it became much harder under his successors. Today our techno-industrial dynasty is in terminal decline. It’s an age of excess, and decadence usually the last stage before collapse.
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Nope! It started when President Woodrow Wilson signed a bill to create the Federal Reserve. Things got worse under FDR when he confiscated gold by executive order (violation of property rights) AND signed into law a Ponzi scheme called Social Security. BOTH WERE DEMOCRATS!!!
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+1
LBJ and Obama also stole private property, and created ponzi schemes (medicare, obamacare). And both were “democrats” (really socialists in drag) just like Woodrow Wilson and FDR.
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No, it started when Abraham Lincoln imposed an income tax to finance the Civil War … or when Hamilton chartered the Bank of the United States … or when Venetian bankers figured out that they did not need to keep 100% of the gold they held on deposit … or when temple moneychangers started to manipulate forced currency exchanges for the purchase of obligatory offerings … or maybe when Adam first laid lustful eyes on Eve or when the first elephant was laid on the back of the last turtle…
Looking for a starting point doesn’t help anything; it doesn’t change anything. Humans are acquisitive, and we don’t like to give up prior gains. That is true for investment bankers driving Maseratis, and it is true for teachers with pensions. We live in a time where future productivity has been overpromised, and someone is not going to get what they believed was theirs. We live in an era where ownership claims exceed available resources, and different groups are jockeying to make sure that their claims are honored over those of other groups. Of course the elites with their central banks, HFT altos, and media organizations have the upper hand, but the big generational picture in America at least and in the West in general is one of wealth rebalancing vis-à-vis the rest of the world.
Bubbles are just a coping mechanism for pretending this rebalancing isn’t real.
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No it was when the Bank of England was given permission by the monarch to print more money than gold held in the mid 1800’s as an ’emergency measure’ as banker to the banks which started it all.
We could take this back to Julius Caesar.
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The mess started around 1870. That’s when the profiteers in and outside government from the past war, first started inventing reasons they should still be involved in something, despite the war being over. So they started the first, and most fundamental of the “war on’s”: The war on freedom itself.
From there, we soon got the Fed, income taxes, drug laws and all the rest of the fundaments of our current totalitarian, progressive dystopia. Then, things accelerated again with FDR, and then went into hyperdrive once Nixon severed the last tie to anything that could not be manipulated entirely without any checks whatsoever.
Obama was a useless clown, like any politician, but give the man break! He’s just another in a long line of destroyers of all that was once worth bothering about at in the US. Nothing more, nothing less. And just as Obama was worse the Bush was worse than Clinton was worse the Bush 1 was worse then Reagan; Trump will be worse than Obama, and whomever follows Trump will be worse than that again.
It’s not like Obama was this weird outliier of bad amongst otherwise Great Leaders. They’re all expendable trash. Every single one of them. At least from Llincoln on out.
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Nixon inherited the federal default that LBJ created. Blame Nixon for whatever “didn’t happen” at Watergate. Blame Nixon for using the IRS/FBI to go after his enemies (blame Obama for the same thing).
But don’t blame Nixon for the war and spending spree that LBJ actually did. They day Nixon took office, the US government was guaranteed to default because of LBJ’s financial frauds.
FDR defaulted because he was a closet socialist, and socialism always and everywhere leads to default and economic suffering.
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You can blame Nixon for the drug war he created in 1973.
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Nope, Nixon didn’t make you take drugs (illegal or not) — you did that to yourself.
Woodstock and its so-called “counter culture” created the drug problem (and LBJ’s little war in Vietnam helped a lot). A bunch of teenagers / 20-somethings acting like infants, rolling in mud like pigs, and stoned out of their minds, hearing music that they are too stoned to recognize… hardly the sort of socialist gathering that Nixon would have approved of.
Oh, and all those babies born to broken homes / single parents, the latchkey kids… that’s on you also. Nixon would not have approved of that either. Drugs may or may not mess up YOUR life (that is debatable, even in Denver) — but they sure as hell mess up the lives of people around you.
You acted like infants, and Nixon the power-tripping megalo-maniac treated you like infants. PS — your kids are still messed up, long after your high wore off
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“Nope, Nixon didn’t make you take drugs (illegal or not) — you did that to yourself.”
He didn’t say Nixon made anyone take drugs, just that Nixon was to blame for the war on drugs.
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Wrong, after a lot if thinking when liberty started going downhill it was clear, it wlent wrong from the beginning when the colonists on the Mayflower came to the U.S. and started the nation by making genocide against native americans, slavery for blacks and not giving equal status for poor white men and women. We like to think there was a glorious time when liberty was respected but it never was just for the rich or powerful. George Washington’s whiskey tax caused a rebellion after he and land owners fought the British for another tax, definitely those who rebelled were not rich folks
https://en.m.wikipedia.org/wiki/Whiskey_Rebellion
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Nothing wrong with defaulting. Quite the contrary. Governments everywhere should do more of it. In fact, tomorrow would be as good a time for a default as any.
But do it the proper way. By not paying. Not by pretending to continue to pay, while robbing the citizenry via debasement. The war didn’t go as you expected and you’re out of money? No different from most ventures. Bankruptcy works like a charm for sorting out that sort out thing.
Nixon made the choice to instead go all in, down the debasement track. And hence, once and for all, put the final nail in the coffin, of what at one time at least aspired to be a decent country.
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You forgot to list that the criminal Obama embezzled money from FNMA to pay some of the costs of his “something for nothing” health insurance scam.
Even judges appointed by Obama have ruled that his embezzlement was illegal. Of course, they don’t call it embezzlement — that term is only used for private sector offenses. When a criminal in government does the exact same thing as a private sector, the jokers presiding over trials say it was ‘unauthorized’ and fine the taxpayer… letting the guilty politician get away scott free.
Obama embezzled $165 BILLION dollars from FNMA to create the illusion that Obamacare was working for a short period. And he won’t do a minute of jail time for his crime.
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I’m no fan of O but you seem to forget the deficits run up by W to fund that disastrous war in Mesopotamia.
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“We are in this mess because obama and the democrsts wanted to retain power.”
And we will soon be in another endless war because Trump wants to retain power.
Round and round we go…
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“Reader Asks: Can the Bubbles Last Forever?”
Answers:
a) A single specific market sector bubble = no.
b) One bubble (or multiple simultaneous) sequenced after another = yes.
The Web encourages and eases participation and speculation so long as credit/capital is available. If the market being speculated in is largest enough it can always become a bubble that threatens economies.
Want to kill bubbles for a while?
i) Kill credit/capital access for speculative purposes, or,
ii) Kill the desire to participate – achived via some massive credit event that sears fear into the psyche for multiple generations.
ii) is a very real possibility in the next 2-10 years imho.
Careful what we wish for.
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One of the most important things anyone has ever said to me about markets.
“No one knows what the fair value is of any traded asset should be.”
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remove “should be” – crap grammar.
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So things like cash flow and future earnings mean nothing?
Good times indeed.
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more like.. should those future earnings be valued at 16 times or 32 times?? I don’t know- you don’t know. The market is an equilibrium seeking mechanism, nothing more – nothing less. Fair value is last traded price.
If you disagree, there is a wonderful place to take your argument. No need to type – trade it!
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Absurd.
Low interest rates do not cause bubbles. If your credit card lowered your interest rate from 29% to 0% on cash advances, would you take out a cash advance and set it on fire?
If you felt some asset was due to fall in price, why would you take out a loan to buy it?
Just like with your credit card the fact is you still have to pay the loan back. If you happen to want the asset then wait for its price to fall. If you are investing then even with 0% it makes no sense to invest in an asset only to lose value on a price drop.
Bubbles happen not because interest rates are low or because there’s too much money floating around. They happen because a critical mass of people *believe* a shared narrative. Examples of such narratives include things like “any day now dot comes will make insane profits for those who brought equity early” or “house prices never go down” or “you can take thread made up of bad loans and weave it into a blanket that is as safe as the highest quality bond”. These bubbles happened because people believed these stories were true, that they represented some new reality. If you really believe some asset is going to zoom up in price, then interest rates aren’t going to deter you. If you thought it is a sure thing some stock will double, it would make sense even to pay 30% credit card interest rates to borrow to buy it.
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If my credit card gave me unlimited money at 0% with no credit check
I WOULD TAKE ALL I COULD.
Into the millions and even billions
Along with everyone else given that opportunity
And invest it in anything else
Which is why we have all these bubbles
Did you even think about your post?
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Bulls**t. You would borrow what you could *if* you could be assured you could invest for a positive return and get the money back fast enough to make the min. payments your credit card would require.
So yea you would be willing to put it in a savings account that earned 0.5% per year…assuming you trust the bank. But would you buy a house that you thought was overvalued? Would you say “yea let me buy this house today for $500,000 and in a year I’ll sell it for $400,000 and owe $100K on my credit card….but hey at least they only demand $3K per month and aren’t collecting interest”? I don’t think so.
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Low interest rates diminish reluctance to take risk.
0.5% rate, 1% return but not enough fat in 1% return to buffer against misjudgement.
Humans are also tempted to think:
A) I was here early so got it cheaper than it will be later on so I can sell at a profit, and/or,
B) I’m cleverer than the next chump so can offload it onto him as he also has access to cheap money.
C) Today will be like yesterday and a chance tomorrow even better.
Barriers to entry to a plethora of markets and strategies are reduced when money is cheap. It promotes bubbles.
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Question. Have you ever done anything with project valuation and financing?
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True however the hallmark of bubbles isn’t a willingness to take risk but a belief that there is little or no risk. Interest rate talk makes sense if you’re talking about taking a cash advance on your credit card if you’re playing at a casino. Perhaps a 13% rate will make you more inclined than a 29% rate. But that’s not a bubble.
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Please tell me you’re not an investor…
Or worse, please tell me that you don’t manage someone else’s money.
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What boonton said is correct.
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He is not counting in NIRP where you are paid to borrow, nor that people expect to be bailed somehow once half the population are uw, etc. There is a group psychology to it, as well as necessity – people will buy houses, and if not will still pay rent to people who buy houses.
Generally lower the cost of borrowing the bigger the bubble, it is mutual as market becomes saturated with willingness to take risk… until govt. decides to guarantee it all so that it everyone who took part remains happy.
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But being bailed out is not a reasonable expectation, even if it happens. Consider 2008. What would you have rather done, invested heavily in the firms that crashed OR shorted them knowing they were setting themselves up for a fall?
Even if the gov’t bails out, it takes a time and you can just as easily be left partially bailed out or not at all. In the meantime your credit is shot and you’ve lost money.
If money is cheap, you are more willing to take risks for *positive* returns. That doesn’t explain why all investors would pile into a single asset, letting it’s price zoom up and risk of a crash increase rather than pile into numerous diverse assets, each with their own opinion on what will be the next big thing.
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Crys, same question I asked Fish… have you ever sat at a table with a bunch of MBA banker dudes trying to do project financing on a billion dollar deal?
You and most everyone here are just ignoring metrics that are essential. Someone even stated (stated!!.. love the certainty people speak with) that cutting rates in half allows you to double price paid for asset. Wonderful, but if the cash flow is the same, that would mean ROE and ROI would be cut in half, and would result in more than doubling VAR – you would be laughed off the table.
Now also remember housing went exponential at 6%+ and people were borrowing/foregoing in the teens to buy gold in ’80 – when it went exponential.
Markets go exponential and crash as a result of psychology, not rates. Fear meet greed.
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ohhh… even better.. someone below has prices going to infinity at 0%.. This is priceless shit and all for free… I had to pay $9 to see Dumb and Dumber.
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crys,
because I like you I’ll even give you physical examples. Say you want to purchase an oil well with extraction costs of $40 per barrel. Is it worth more with $100 oil and 5% rates or $45 oil and 1% rates. Same for a farm. Corn at $2 a bushel @ 1% or corn at $5 a bushel @ 5%?
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“Markets go exponential and crash as a result of psychology, not rates. Fear meet greed.”
….
NBER did a paper (early 80s) on bubbles. It was quite fascinating. Long story short – right before bursting returns do go exponential… before crashing. Why? To keep everyone IN. A plateauing of returns would allow investors to start thinking ‘hhmm, the ride has been fun … maybe I should get out’.
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MBA meets reality when people don’t take their money nor listen to their law. Prices to infinity = money worth zero in real terms, such as costs more to hold it than to spend it, the function being the timescale to worthless.
The practical example of the oil well means 0 because you haven’t ( and cannot) calculate in a thousand other resulting metrics that a set rate influences. Try real terms… but you could not tell me the deflated value of the money tomorrow, only extrapolate current trend and speculate that the market for dollars is still there tomorrow. What is more likely to be there is a market for oil, so likely a good investment either way considering money will be tailored to meet its ( necessary) supply.
We are arguing religion again I guess…
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No, we most certainly are not.
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your argument irrelevant no need to speculate…see chapter on using markets for hedging. I need to walk dog.
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The zero bound is an interesting window on monetary policy, and prices to infinity is correct IF caveats are NOT applied.
A bank opens and offers the PUBLIC 0% lending AND uses inflationary expectation to underwrite the borrowers return, OR better still has an interest only clause at 0%, there would be nothing to stop the entire population from turning up and becoming millionaires. You tell me how reserve requirements might limit that and I’ll find you a way around.
BUT the real world is not like that. Policy is tailored within a framework that has marginal limits as well as arbitrary decisions included by the lender that are based on expectations and legal barriers. If you look through it I think you will find that the whole framework is designed to orchestrate the economy and enterprise along certain lines. It is not that there isn’t 1234567 Terabytes of math behind it, it is that that math is used to formulate an outcome that suits realworld political, social, industrial, needs/greeds and ideology. That is the ‘danger’ in having a monetary system that is open to abuse, as the very meaning of the currency unit becomes detached from the cumulative individual representation it logs and instead has an adjacently imposed meaning attached to it by our community of planners.
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Crysangle,
I have been in investment banking for almost three decades, I suggest you listen to him.
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Trouble is I have an attitude problem that keeps me pointed upstream.
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“A bank opens and offers the PUBLIC 0% lending AND uses inflationary expectation to underwrite the borrowers return, OR better still has an interest only clause at 0%, there would be nothing to stop the entire population from turning up and becoming millionaires.”
Holy shit Crys,
That fails accounting 101. Any amount you borrow would be offset by creating an equivalent liability, therefore net equity would always change by 0. You could borrow a billion… Your net remains 0. Basic basic basic accounting.
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We are on different planets here. Net equity remains the same however the asset that is now on the banks books, the loan that was created without restraint due to no interest due, is a cash liability in the hands of a happy consumer…. except it is not even a liability given that at 0% there is no loss to be made at the moment of creation of the loan. Why? 0% implies there is no cost or risk associated with creating the loan, interest only of 0% means you can keep it, negative rates means ‘ we pay you to take the money’. The results would be obvious, so that is why I say it is a policy for banks, not the public. Fractional lending would mean the amount of loans that could be created, providing currency to consumer, especially given ratings on loan performance would seem top notch, would increase money supply enough to cause a ‘ little bit over 2% inflation’, probably ruining the meaning of the dollar and US finance definitely.
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So, Fed Finds at few thousand percent per hour, wouldn’t have put a crimp on the housing bubble? Because interest rates don’t matter as long as strawberry pickers “believe the narrative?”
Talk about believing the hype…..
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All manias are finite in duration, but bankers can confiscate the people’s stuff for decades. Bankers can even print banana republics, if they print long enough.
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+1.
As long as there are still the occasional sap left who bothers doing something productive, instead of trying to get into the asset pump rackets, the banksters will have some stuff to confiscate.
Over time, fewer and fewer will bother with the productive part. So the pickings for the banksters will eventually decline, like in Zimbabwe and more recently Venezuela. They’ll still remain “the rich” compared to those they rob. But eventually they’ll either get sacked from the outside. Or the people become so destitute, that the cost of the propaganda and terror state, that keep them mindlessly in thrall to whatever the banksters call “The Law,” adds up to more than whatever the banksters can squeeze out of them.
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I think Global Reserve Currency gives the US a lot more options and leeway.
Reality will leak into the USSA past the Feds one lever GOSPLAN just like it got around the original GOSPLAN in the USSR, but it may take 70 years of malinvestment to do so.
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The USA is hardly the first reserve currency to spend itself bankrupt. We aren’t even in the first ten. Its just dumb for anyone to suggest being a reserve currency exempts a country from reality.
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Where does he say it exempts the US from reality? Or that being a reserve currency protects the USA from bankruptcy? He’s saying the exact opposite, in fact, just that it may take awhile.
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First sentence: “I think Global Reserve Currency gives the US a lot more options and leeway.”
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Monetary sovereign governments cannot spend themselves bankrupt in normal circumstances, in their own currency. They can only go broke in a foreign currency. You’ll find all bankruptcies in Central Banks have only gone bankrupt in foreign currencies.
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ejhr2015 ==> Soros troll, indoctrinated in a UC political camp
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Sorry, It’s the REAL WORLD of which I speak. I’m not making it up and there’s plenty of evidence behind it. Mainstream shills of which you appear to be one, are lost in dangerous fairy tales, 100% wrong every forecast they make. I don’t study Soros, but I think he’s with you not with me. Your evidence, please?
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He is right Medex, governments can only bankrupt the rest of society.
It is interesting though – when a country cannot meet its international obligations the force of international trade and dependence is enough to send the government itself over the edge…usually they think they can print foreign supplies into existence… doesn’t tend to fool the population though.
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@crysangle — you are assuming the population agrees to store their wealth in the worthless domestic currency… not a valid assumption.
Look at Greece. For years, the Greeks transacted in worthless Drachma, but stored their financial wealth in Swiss Franc or D-Marks. Socialists / academics seem slow to recognize how many Greeks have wealth stored in olive trees and farm land (which the Greek government can’t really seize without causing food shortages / riots / rebellion). Plus, everyone knows a government that seizes property will be out of power very quickly — and they have centuries of evidence supporting that view.
Look at continental Europe. Royal French francs are long since worthless, along with royal Spanish pesos and royal everything else. Countless new french francs, new pesos, etc. But art seems to hold value. And many Europeans live on the same property (updated / repaired, but same house) as their great great grandparents.
Bad currencies come and go; bad governments come and go — but the population lives on. Centuries and centuries of evidence to support this.
As for what quack theories the academics have about fiat currencies — centuries of evidence that these theories do not pan out in reality.
This time will NOT be different, no matter what CNBC tells you
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Agreed, but when you look at Greece for example, or Venezuela, you cannot deny that government policy has had a good shot at ruining those countries…a lot of people kept real wealth of some kind, but a lot of people went to the gutter or simply left the country also.
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Greece is not monetary sovereign any more. They use the Euro, a foreign currency. Venezuela has, among other errors got a lot of US $ debt. Venezuela is a good illustration of the problems with NAFTA. and mismanagement of its ways and means. The loss of oil revenue is a tragedy but the loss of its agricultural capacity is self inflicted , through mismanagement of NAFTA. This has happened to Mexico also. Now the situation is so dire that Venezuela cannot buy its way out of its impasse because its currency has lost support.
So rule 1] Never borrow in a foreign currency. Argentina and now Venezuela show why.
Like Zimbabwe, Venezuela destroyed its agricultural base and couldn’t feed itself. ETC
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Our family is now off the margin on consumption…we are on a needs only basis when spending money…once the marginal buyers in enough consumer categories declines the show is over for our economy…I wish there was research available that would show changes on the margin…I think this would be a leading indicater worth watching…
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I think there must be some series under discretional spending.
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@boonton – I think the *trend* in interest rates is undeniably a factor in financial bubble creation. As long as interest rates are going down and asset prices are going up (i.e. asset purchases by the Fed), investors do not care what a “prudent price” for an income producing asset is. All they care about is the spread between the income stream and the cost to borrow the money. If the interest rate goes down by half, then a purchaser can pay 2x the price with borrowed money and still cover the debt service. Want to lower the debt payments even more? Borrow money with an interest only loan and a balloon at the end. The balloon is no problem as long as the principle can be rolled over when it comes time to pay. Remember what happened in 2008 when the money markets “froze?” Suddenly large corporations couldn’t roll over their balloon payments. That experience is proof that borrowing money short term and continually rolling it over to finance long term obligations is a great way to minimize debt service payments until it isn’t. That’s not a good way to manage a balance sheet IMHO, but that still seems to be the standard model for big business even today.
Eventually there is no margin of safety and when the cost of debt cannot be pushed down more, or the price of assets cannot be pushed up more, or when something unexpected goes wrong, then the whole carefully balanced tower collapses as a chain of default hits everyone at the same time. In other words, the bubble “pops.”
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Margin of safety – absolutely critical.
Longer it rolls the less MoS is in the minds of very many participants.
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In theory prices on everything could go up indefinitely. There are a plethora of monetary mechanisms and rule changes that could achieve this.
However there are trade-offs. Society would have to accept that official channels dominated the markets by one means or another, something akin to rationing and dictate, which would replace normal market incentives. What is more the real price ( what you might buy per hours work) would most likely increase even faster, giving the reality of increasing numerical values but less on your table after a days work.
We are sort of half way to that now, with resets built in, and still some market variability, but still a long way off having values set freely. I don’t think Anglo society would tolerate much more in this direction, it is a kind of socialist fascism that has to hide behind some kind of half acceptable reasoning, as well as allowing perceived wealth to at least not decrease for a majority. However as the potential losses as result of the current bubble become obvious to the ordinary person ( breakdown in order and of ownership), as more people become dependent on government subsidy, as automation relieves the workforce, as ownership becomes more concentrated, it is likely that a more total control will be both offerred and more widely asked for. It would be painted as necessity, or a form of progress, a new deal, a social contract that puts government and ownership into the hands of the public etc.
Could it work? I don’t know, certainly not currently as the whole understanding and philosophy of society and government would have to be completely different from what has been experienced up to now. Put it this way, if mankind evolves to the point where mutual respect is normal, where ownership of the necessary is without need of competition, where free time is plenty and freedom to pursue private endeavour is not based on financial reward but a sense of creativity or achievement, and government is the population… well I doubt prices will much come into anything. That is in a sense where we came from, our competition being an advantage as well as a setback, and one that cannot be compensated for forcefully by policy alone as policy inevitably levels abilities and rewards to a norm, but that fails where the motivation of achievement is still necessary and being practiced to help reach and define a level of wellbeing that is widely accepted as sufficient, or cynically to maintain a certain control over the population.
However the irony in it all is that should society and economy evolve to some kind of eutopic reality of that nature, the last thing it would want is to have financial bubbles. By then it would be widely understood that money in the economy is like electrons flowing through a sophisticated computer, meaning a unit that is at all times representative which allows the process of calculation to take place accurately. It would be understood that to plug in a higher voltage in the hope of getting a bigger result somewhere, would simply ruin the machine. The current system is a socio political one that is open to improvisation based on arbitrarily allocating reward and demand, the true economy is forced to try to incorporate that improvisation.
So one way ( financial system intolerance), or another (revolution), or another ( total price setting), or another ( some kind of social philosophical evolution) – the bubble will end.
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@chrysangle — are you just using Mein Kampf as your playbook? It was called national socialism then, and yelling “feel the burn” is no different than yelling “heil hitler”. Same centralized corruption of absolute power.
And indoctrinating / brain washing the kids at UC Berkley (and ASU, and many other so-called universities) into the national socialist party? Even if the schools are too dishonest with themselves to acknowledge that is what they are doing?
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For which part? The idea of something similar to government being the population is along the lines of direct democracy – policy always being voted through by referendum, say online, with strict tax/spending limits and hard money. No ‘government as such’ necessary. You’ll find small societies ( not socialist or communist) that function along that way, but not sure it can or should be extended to nation.
Meantime
http://alt-market.com/articles/3171-the-real-dangers-behind-the-syrian-crisis-are-economic
has hypothetically stretched Syria and ME into a globalist outlook, not sure whose struggle that would be, ours? Out tomorrow, La Garde’s latest bulletin ‘Your Struggle’, a tale of bribery and austerity wrapped into a top floor five course meal.
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Anyway, I haven’t read Mein Kampf, only the financial and monetary history of the period.
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‘eutopic reality’ better? I thought of putting the ” while writing but omitted as I figured there had to be some aspiration, not to mock it.
Whatever, but I also know which directions I am staying away from.
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It is funny, as I re-read this to try and figure where the crossed lines are, though they didn’t generate a spark, more of an eathly dismissal. I wonder, Medex, why you would consider any move to decentralize as an ideological jump that has some form of dictate behind it, whereas though you are fast to question financial globalization, the removal of part of what you might consider necessary establishment would be a step too far? Maybe I misread your initial comment, I did not take it personally but more as of a questioning suggestion designed to test attribute. Puzzled, and sure you will enlighten me beyond placing a poorly understood (by myself) insinuation. I say this because it matters to me… I don’t much like confusion, nor generating it in other people, and am naively curious as to what nerve I might have hit. Maybe our world is already defined by the colour of prejudice we are accused of or subject to , but that would be a shame in a purely academic discussion.
?
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Nominally, yes it could be propped up by central banks.
I think the real point, though is this- the Federal Reserve, for example, wouldn’t end up owning everything- long before that point is reached, no one would take a dollar for anything. The market would end up being worth quintillions of dollars- or a value essentially incalculable, but you could only buy stock using some other currency that wasn’t debased.
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Thinking out loud.
What if the only way out of ZIRP, NIRP is some future massive disaster that reduces access to necessities and reinvigorates the value of money?
Natural disaster, war or some self inflicted monetary armageddon.
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Thinking out loud, if there is some massive disaster — humans need food, clean water, shelter / warmth and possibly medical care. No one cares about currency.
Pick up any survival manual you like. Go with the Red Cross version to avoid the tin foil hat crowd — RC lists the essentials as: shelter, food, water, medicine.
In today’s Venezuela, fubar’d by socialism, everyone is desperate for toilet paper, food and clean drinking water. Everyone has plenty of worthless Venezuelan currency, but its no use for wiping your backside.
Everyone in Weimar republic Germany had wheelbarrows full of cash (literally). Everyone wanted to dump the worthless cash for stuff they actually needed.
And for those in the USA who lived in areas effected by hurricane Katrina or storm Sandy ( or hurricanes Hugo, Andrew, etc) — we all learned how worthless an ATM card is in a disaster, the limited value of cash… and the absolute supremacy of a spare tank of gasoline and a generator.
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Yes, people have to participate in the meaning of money, if it becomes openly dictated people disassociate from it, no longer can relate to it. Money, especially fiat, is a sort of hypothesis that only exist as money when people believe it to be.
Fish, you have to first think or say where you want the way out to be, what sort of result/monetary/economic base you think is worthy. It is possible to have a programmed financial reset, but really you would be reallocating worth and liabilities so it is not likely to be accepted until a big majority of people feel it is in their benefit…basically openly redealing the cards. Another possibility is the informal economy and alternate currency taking over if the established one moves out of accessible reality or turns into confetti land.
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Dear Mish,
What if the question would have been: can this go on for 10 years before the bubble burst? What would have been your answer then?
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It’s already gone on for at least 2-3 years.
Can it go on another 7-8?
History would suggest that’s highly unlikely and so would I.
Impossible? I do not believe anyone can say that.
Something will break
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What value money once the peoples needs are addressed?
The West might be in a new era of basic needs largely covered.
This can fold back into the rate on money.
A linkage between little lack of necessities, rates of return and ultimately the rate on money. Related to how much labour time is needed to deliver the necessities.
Perhaps once necessities are covered it moves on to the next hierarchy, bigger/better housing, cars etc that are options, not necessities. With options comes the option not to purchase/want, not so with necessities.
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That is something I mull over. You end up with older mindsets and hierarchy being displaced by new attitudes and influences. Even within the most basic economy of a household meanings, pride, respects, change. What bothers me is that instead of a new world of opportunity opening up for people, it seems to have been politically harvested and pre-financed at various levels, leaving people in precarious position and with simple participation relegated to some kind of inferior status. It is as if the natural competition has been put on chrystal meth, and the social reorganisation on the rails of pc liberal and financial dictate.
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How to time bubble pops:
Well, wait until your barber gives you hot stock tips?
In 2000 the barber was a cab driver.
Didn’t notice whether there were any stand-out barbers in 2007. Too many of them for any to stand out, perhaps?
Are “barbers” touting stocks yet in 2017? No? Still a climb to go.
I watch spam, but doubt if it’s a good measure as spam stock-tips seem to come in waves now and then at random.
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Is there a measure of the PE or PEG of the least loved sector that is a warning that even out of favour is over priced compared to in favour in bear periods?
If not an absolute PE, PEG then perhaps a differential between most and least loved?
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Oooo. I like it, Fish!
Generalize a bit: Examine the shape of the PE distribution curve by individual stocks and by various sub-sets of stocks. Are those curve shapes different at bubble time?
Or crank up the machine-learning prediction-computer, feed it complete historical data, and train it to predict price changes or dramatic rises and drops.
May need serious work to avoid over-fitting.
Anyway, finding correlations are what learning machines do for a living, so I’d think this is covered ground.
Seems like fun though.
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The numbers guys say you can’t use PE to beat the market. But we all feel when the whole market has a high PE, it’s due for a drop. The PE, that is. Not necessarily the price. ‘Cause rising earnings fix high PEs as well as lowering prices do.
A thought: High PEs are common and reasonable in hi-tech situations where someone has found new ground to plow. The market isn’t dumb. It sees that Amazon is going to make a lot more money than it does right now. So, high PE.
Now, if you think of “Amazon” as simply being a purer-than-usual example of computerization-meets-world, what happens if the same driving force of computerization behind “Amazon” is powering more than just a few hi-tech companies?
Like, most companies.
Wouldn’t the market PE be high. And wouldn’t it come down by earnings finally coming in rather than a price crash?
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Bubbles cannot continue forever. Human emotion is what drives bubbles, and that is in constant flux. For the same reason Depression and dictatorships will not last forever. It was change in attitudes that resulted in BREXIT, Hillary’s failed presidential bid, and LePen’s rise in popularity.
People fracture from herds to form their own herds. The results can be positive as in a start-up company inventing new products, or it can be destructive as in revolution.
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When interest rates go to zero then assets can go to infinity. Couple with this the soon-to-be abolition of cash and no requirements for banking reserves. This toxic mixture will keep the party going for some time yet.
So I personally do not see these bubbles going away until there is some sort of major political or existential shock; say a nuclear explosion on the mainland? Or how about an EMP that knocks out the electric grid? Or the abolition of dollars as a currency of trade throughout Eurasia (see New Silk Road Project)?
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Try the next recession.
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Considering the records of Greenspan, Bernanke and Yellen over the last 30 years, if a recession hits they will just double down again. During the next deep recession rates will be set negative in nominal terms, not just real terms. I simply cannot see an escape from the trap the central banks have constructed for themselves. Yellen looks like a deer in the headlights every time she makes a public statement.
Of course this may lead to a defining political or existential event as people take to the streets for their own survival – or they abandon the dollar, move to a barter economy – and the government collapses.
In which case we will both be correct.
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“Can central banks prevent crashes or declines forever? History says no.”
I would actually divide the period of central bank intervention as pre-2008 and post-2008. The scale of intervention post-2008 is so immense and on continuous basis – in both visible and invisible ways – is IMO psychologically different. Also the scale of coordination between central bankers since 2009 is almost like a relay race. They seem determined to ensure that the market does not drop (not even 1%, forget a crash). My reading is that what they saw in 2008 has forever changed their view about intervention. Post-2008 the scale of intervention is so much that it does appear they can stop declines for ever. Also much of it through jawboning – raising expectations at moments when it appears the market would break. Each time the market looks like breaking some heavy handed intervention happens (not visible to us — e.g. reversal on Trump election, Shangai accord, Bullard low, Brexit coming together etc.) The short sellers have been handed their heads so many times in the past few years. Thus while history may say they cannot prevent crashes or declines forever, they seem to be doing a great job over the last 8 years. .As it is since they have done it for nearly a decade, with the ability to add a few more years to it, it looks like they can do it ever.
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The Business Cycle has not been repealed.
All the Federal Reserve (and other CBs) have done is piggybacked monetary policy onto a typical (yet very weak) recovery part of the cycle. Bernanke patted himself on the back for saving the world (utter nonsense). When (not if) the US enters another recession the aura of Omnipotence of the Federal Reserve will evaporate … and equities will get shredded.
Once the recession hits looks for more of the same playbook – QE and NIRP – but not before stocks fall substantially (they’ll need the markets to fall to provide political cover for the screwing they’ll do to savers).
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I wonder about that. (wonder.. not implying yes or no). How much the diversifying of an economy would mitigate the business cycle. The U.S. clearly had enormous susceptibility to oil shocks, with that taken away, that must make the economy more stable????
So would a completely and perfectly diversified economy then create the possibility of an economy that simply grows oscillating at a very low volatility around productivity growth????
Diversification has to at least lower volatility?? Unless things all correlate to 1.
Hopefully my dealer gets me a bag of weed and I can ponder this in the appropriate mind frame later this evening.
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“How much the diversifying of an economy would mitigate the business cycle.”
…
The one constant has the ever escalating level of debt … for business, government, and households. Consider households:
Aggregate household debt balances increased substantially in the fourth quarter of 2016. As of December 31, 2016, total household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. Overall household debt remains just 0.8% below its 2008Q3 peak of $12.68 trillion, but is now 12.8% above the 2013Q2 trough.
Mortgage balances, the largest component of household debt, increased during the fourth quarter. Mortgage balances shown on consumer credit reports on December 31 stood at $8.48 trillion, an increase of $130 billion from the third quarter of 2016. Balances
on home equity lines of credit (HELOC) were roughly flat and now stand at $473 billion. All types of non-housing debt balances grew in the fourth quarter, with a $22 billion increase in auto loan balances, $32 billion increase in credit card balances, and $31 billion
increase in student loan balances.
https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2016Q4.pdf
ANYTHING (such as, uh, recent interest rate surge) that impedes surge of credit … will spell trouble for economy.
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Also, in looking at the USA $8.48t in mortgage debt now versus the same number 10 years ago, does not tell the entire picture.
Back in 2010 the number of households with mortgage debt was 47%. In 2013 it was 42.9%
http://www.mortgagecalculator.org/helpful-advice/mortgage-statistics.php
So the $8.48t is spread over fewer households. Even though the cumulative total mortgage debt level has not increased, average debt per mortgaged household over 10 years has risen for sure in nominal terms, and maybe also in real terms.
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Good thought, demand will always be a variable though dependent on credit, demographics etc.
Diversification would suggest lower volatility in my book.
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“Can this go on forever?”
…
The same story for Ages …. Is it different THIS time?
NO
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“I think the Fed will buy assets in any crash in stocks, bonds, real estate, etc.”
…
Bob,
No. Article 14 of Federal Reserve Act explicitly states what the Federal Reserve can purchase thru Open Market Operations. Janet Yellen last year stated that at some point Congress should reconsider what FR can purchase (as in ability to purchase equity like other central banks). Down the road things may change, but for now a REPUBLICAN controlled Congress – who blathers about auditing the fed – I SERIOUSLY doubt any changes to Article 14 as long as they control power.
Imo, we’re headed for another (bad) financial crisis … in the aftermath I can see changes, but not now.
https://www.federalreserve.gov/aboutthefed/section14.htm
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We are in this mess because of CAREER politicians, not the Fed. You could end the Fed tomorrow and the political corruption and loss of freedoms would still keep money off the grid and not flowing freely to fund ideas, which was the heart of our once vibrant economy.
Armstrong has nailed every major turning point, almost to the day since the Russian rubble crash – not because he has some Devine clairvoyance, because he eliminates emotions and biases and listens to the data/cycles that repeat. Stocks will crash when retail jumps in, which has not even occured yet. The current rally is driven by foreign flows and short covering by the eople calling for a crash any day.
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“Stocks will crash when retail jumps in, which has not even occured yet.”
…
Care to cite evidence? Last time you said this I pointed to record levels of ETF $$s and margin debt as evidence retail all in … I mean after EIGHT FULL YEARS … you still think there is retail money waiting to get in the market??
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He already cited Martin Armstrong.. ’nuff said.
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just typing the name makes me feel dirty.
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What are you implying? Care to site an instance where Armstrong’s forecasts or logic has been wrong? http://usawatchdog.com/strong-dollar-could-cause-bond-market-crash-martin-armstrong/#more-18838
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Yes. Since you are so convinced I am wrong, you must be one of the shorts that is losing his shorts and fueling the rise by covering your loses. I highly suggest you search any subject on Armstrong’s site, as thinges are about to get very interesting with the French and German elections. Look globally if you want to know what’s coming.
https://www.armstrongeconomics.com/armstrongeconomics101/training-tools/understanding-the-rally/
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Of course bubbles can’t go on forever. But they can go on much longer than any rational person might expect. Trying to time them in order to profit is not a very good strategy, though any seasoned investor will typically have a small percentage of their overall portfolio in speculative situations. Occasionally, some will become famous by making huge speculative bets, and be fortunate enough to get the timing right (Paulson, Soros, etc.).
But there are far more, who you never hear about, who bet wrong and lose everything.
As for who is responsible for bubbles, I can’t help but laugh at many of the earlier comments. You Americans are truly a divided bunch. Each side blames the other for every problem that exists today and you will carry these ridiculous feud’s to your graves. Which side is the Hatfields, and which side is the McCoys?
I would like to tell you to start working together rather than wasting your time fighting and blaming each other, but I imagine I’d be wasting MY time.
I learned long ago to not focus too much energy on what I cannot change. Just focus most of my energy on things I can.
Best of luck. Cheerio!
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“I am sure the Fed will not own everything.”
Will anyone question this assumption? As each crash threatens, they buy a little more to prop the market up. At each surge, sell a bit. No “market” crashes, if you have money creation capabilities, and the gall to use it, yes? The percentage creeps up slowly, and no one objects too loudly. Twenty years from now, where will it be? 40%? 60%? 90%? From the FED’s perspective, is there a practical limit?
One consequence: If you can get listed on a major exchange, you always have “investors”! Nice!
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“Reader Asks: Can the Bubbles Last Forever?”
The math on bubbles is that 100% burst and deflate. A bubble is a cycle. Cycles have an up phase and a down phase.
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Actually, it all started at the beginning of the Agricultural Revolution. There has been financial shenanigans, corruption and persecution of one type or another ever since. One, usually small, group trying to take advantage of many. Humans as a whole do not trust one another enough to establish common goals, get along, work together and share.
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Hi Mish,
Another great post, thanks.
What do you base your SPX fair value targets on pls?
Many thanks
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Its not about politics. Its not about the red or the blue, its about the green. Get over your left vs. right dialectical views. Its a smokescreen/Kabuki theater.
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It’s not a bubble, just inflation, as the national debt rises inexorably- have a look at the Caracas stiock exchange(NHasdaq IBVC:IND): one record after another, with the economy in a shambles. (the same applies to the U.S., albeit if not in a complete shambles)
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