Tag Archives: asset prices

The Greatest Crackup the World’s Ever Known, by MN Gordon

Posted on January 21, 2022 | Leave a comment

This is going to be the crackup to end all crackups. From MN Gordon at economicprism.com:

By now, anyone with half an inkling of curiosity about why prices and values don’t add up has traced the divide back to the money itself.  It’s not hard to see.

Asset prices, like houses and the major stock market indexes, have lost all visible connection with the underlying economy.  However, wage growth has stagnated; over the last 40 years low level wages have only increased by $0.32 per hour in real inflation adjusted terms.  Stocks and residential real estate, at the same time, have gone to the moon.

Even with the NASDAQ’s 11.2 percent decline from its all-time closing high set on November 19, the index is still up over 110 percent from its March 2020 low.  What will it take for the NASDAQ to crash back to earth?

Something else that has gone to the moon is government debt.  In 1980, the national debt was $908 billion.  Today it’s over $29.8 trillion.  That’s an increase of over 3,181 percent.  Over this time, however, gross domestic product (GDP) has only increased 632 percent – from $2.86 trillion to $20.94 trillion.

Of course, these are merely the facts and figures.  The effects to countless Americans are hard to measure.  But, by and large, the last 40 years have been a great disappointment for the American worker – and an absolute boon for the political elites.

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Inflation, asset and consumer prices, by Alasdair Macleod

Posted on June 25, 2021 | Leave a comment

Inflationary dollar collapse or deflationary depression? That’s the choice facing the Fed. From Alasdair Macleod at goldmoney.com:

“The Fed finds itself between a rock and a hard place: either it keeps inflating or the whole confidence-based valuation of financial assets collapses. Either it raises interest rates or the dollar collapses.”

There has been occasional speculation about what happens to asset values in a hyperinflationary collapse. The basis of the question has recently become suddenly relevant, because consumption in America and Britain has been stimulated with unprecedented monetary inflation aimed at consumers, and been met with limited supply, leading to strongly rising prices across the board.

In short, unless urgent action is taken, the possibility of a hyperinflationary outcome has become a possibility. The only alternative is to stop monetary inflation and thereby deliberately crash the global economy.

Along with other central banks, the Fed is trapped. We will assume that rather than face this reality, governments and central banks will continue with their money printing until both their fiat currencies and financial systems face collapse. All precedent points to this choice.

That being the case, an examination of how a collapse in the purchasing powers of fiat currencies is likely to affect asset and consumer prices is timely. This article draws on theories of money as well as empirical evidence in search of some answers. The answers will surprise and discomfort many of its readers.

Introduction

It is a common perception that in inflationary times financial and tangible assets afford protection from monetary debasement. Instead of rapidly escalating, so long as the consequences of inflation are contained as they have been since the early 1980s, non-fixed interest investments have been good inflation hedges. But what happens to asset prices if inflation is not contained and escalates?

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Houses, Money, Stocks, and Bikini Girl Graphs, by John Wilder

Posted on August 30, 2020 | Leave a comment

The crowd is seldom right. From John Wilder at wilderwealthywise.com:

“Can the stock market survive a nuclear holocaust? Yes, says our next guest, and he’ll tell us what stocks to buy and what to sell in the event of a thermonuclear exchange right after these messages.” – Head Office

Superman® won’t take Bitcoin as payment after dark.  He avoids crypto night.

“Housing prices only go up.”  I first heard that in the 1990’s when I was buying my first house.  The realtor was quite clear that a house wasn’t just a house, it was an investment in the future.  He had no idea what my kids could do with Sharpies®, hot sauce, and matches.  And that was just the living room carpet.

“The dollar is as good as gold.”  I haven’t heard that one used about the dollar in my lifetime, because the dollar hasn’t been backed by gold since August 15, 1971.

“The stock market is the place to put your money.”  That’s still what people are saying.

One thing that I’ve found throughout my life is that, generally speaking, if everyone believes in it, it’s wrong.  The major exception to this is physics, which explains gravity well enough that almost nobody can argue with it.  I read a book on anti-gravity once – couldn’t put it down.

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The Fantasy of Central Bank “Growth” Is Finally Imploding, by Charles Hugh Smith

Posted on August 28, 2019 | Leave a comment

How about that, central bank debt monetizing government debt at ultra-low interest rates isn’t the route to healthy growth and permanent prosperity. From Charles Hugh Smith at oftwominds.com:

Having destroyed discipline, central banks have no way out of the corner they’ve painted us into.

It was such a wonderful fantasy: just give a handful of bankers, financiers and corporations trillions of dollars at near-zero rates of interest, and this flood of credit and cash into the apex of the wealth-power pyramid would magically generate a new round of investments in productivity-improving infrastructure and equipment, which would trickle down to the masses in the form of higher wages, enabling the masses to borrow and spend more on consumption, powering the Nirvana of modern economics: a self-sustaining, self-reinforcing expansion of growth.

But alas, there is no self-sustaining, self-reinforcing expansion of growth; there are only massive, increasingly fragile asset bubbles, stagnant wages and a New Gilded Age as the handful of bankers, financiers and corporations that were handed unlimited nearly free money enriched themselves at the expense of everyone else.

Central banks’ near-zero interest rates and trillions in new credit destroyed discipline and price discovery, the bedrock of any economy, capitalist or socialist.

When credit is nearly free to borrow in unlimited quantities, there’s no need for discipline, and so a year of university costs $50,000 instead of $10,000, houses that should cost $200,000 now cost $1 million and a bridge that should have cost $100 million costs $500 million. Nobody can afford anything any more because the answer in the era of central bank “growth” is: just borrow more, it won’t cost you much because interest rates are so low.

And with capital (i.e. saved earnings) getting essentially zero yield thanks to central bank ZIRP and NIRP (zero or negative interest rate policies), then all the credit has poured into speculative assets, inflating unprecedented asset bubbles that will destroy much of the financial system when they finally pop, as all asset bubbles eventually do.

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Tales from “The Master of Disaster”, by MN Gordon

Posted on May 24, 2018 | Leave a comment

Rising interest rates will deflate asset prices. From MN Gordon at economicprism.com:

Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year.

As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.

If yields continue to rise, this one thing will change everything.  To properly understand the significance of rising interest rates some context is in order.  Where to begin?

In 1981, professional skateboarder Duane Peters was busy inventing tricks like the invert revert, the acid drop, and the fakie thruster, in empty Southern California swimming pools.  As part of his creative pursuits, he refined and perfected the art of self-destruction with supreme enthusiasm.  His many broken bones, concussions, and knocked out teeth earned him the moniker, “The Master of Disaster”.

But as The Master of Disaster was risking life and limb while pioneering the loop of death, the seeds of a mega-disaster were being planted.  In particular, the rising part of the interest rate cycle peaked out in 1981.  Then, over the next 35 years, interest rates fell and these seeds of mega-disaster were multiplied and scattered across the land.

Credit and Asset Prices

The relationship between interest rates and asset prices is generally straightforward.  Tight credit generally results in lower asset prices.  Loose credit generally results in higher asset prices.

When credit is cheap, and plentiful, individuals and businesses increase their borrowing to buy things they otherwise couldn’t afford.  For example, individuals, with massive jumbo loans, bid up the price of houses.  Businesses, flush with a seemingly endless supply of cheap credit, borrow money and use it to buy back shares of their stock…inflating its value and the value of executive stock options.

To continue reading: Tales from “The Master of Disaster”

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