Tag Archives: Financial bubbles

Do You Hear the Bells Ringing? by MN Gordon

The story of Ivar Kreuger was the point of departure for an Ayn Rand play (The Night of January 16th) and it holds lessons for today. From MN Gordon at economicprism.com:

There’s an old Wall Street adage, you’ve likely heard it, “No one rings a bell at the top (or bottom) of the market.”

The bell, of course, is the signal to sell at the market top.  Here we pause to take exception with this adage.  As far as we can tell, bells do ring at market tops.  Yet few hear them.  Most people’s ears are plugged with the prospects of easy riches.

Bull markets often give way to manias…where an asset’s intrinsic value becomes less important than the hope that an overpriced asset can be later offloaded at a higher price to a greater fool.  Certainly, irrational pricing based on greater fool dynamics is the sound of a ringing bell.  Though this can go on for years.

The current ratio of total market capitalization to GDP (now over 200 percent) is most definitely the sound of a ringing bell.  Another ringing bell is the $500 million batch in junk bonds recently sold by MicroStrategy for the sole purpose of buying bitcoin.  These bitcoin junk bonds pay a generous 6.125 percent coupon rate.

How will MicroStrategy pay the coupon if bitcoin goes down?  Will they sell more junk bonds?  Will anyone buy them?

Do you hear any bells ringing?

At the moment (at the market top), few people do.  These bells won’t be heard until after the market craters.  In retrospect, it becomes obvious that, at the market top, bells had been ringing practically every day.

The sound of a bell ringing at the market bottom is much more grim.  At real market bottoms, people kill themselves.  That’s when the great frauds are revealed.  And some former titans of industry are revealed to be great swindlers.

Today we look back nearly 100 years to one of the great Wall Street swindlers.  We squint for parallels to the present.  There is instruction to be found…and frauds to avoid…

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It Always Ends The Same Way: Crisis, Crash, Collapse, by Charles Hugh Smith

Financial bubbles, particularly central-bank, fiat-money fueled bubbles, always pop. From Charles Hugh Smith at oftwominds.com:

Risk has not been extinguished, it is expanding geometrically beneath the false stability of a monstrously manipulated market.

One of the most under-appreciated investment insights is courtesy of Mike Tyson: “Everybody has a plan until they get punched in the mouth.” At this moment in history, the plan of most market participants is to place their full faith and trust in the status quo’s ability to keep asset prices lofting ever higher, essentially forever.

In other words, the vast majority of punters are convinced they will never suffer the indignity of getting punched in the mouth by a market crash. What makes this confidence so interesting is massively distorted markets always end the same way: crisis, crash and collapse.

The core dynamic here is distorted markets provide false feedback and misleading information which then lead to participants making catastrophically misguided decisions. Investment decisions made on poor information will also be poor, leading participants to end up poor, to their very great surprise.

The surprise comes from the falsity of the feedback, as those who are distorting markets want punters to believe “the market” is functioning transparently. If you’re manipulating the market, the last thing you want is for the unwary marks to discover that the market is generating false signals and misleading information on risk, as knowing the market is being distorted would alert them to the extraordinary risks intrinsic to heavily distorted markets.

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Warning Light Flashing Red, by Charles Hugh Smith

People ignore warning lights in financial markets until they get run over. From Charles Hugh Smith at oftwominds.com:

When the warning light is flashing red, it’s prudent to have a capital preservation strategy in place.

Not everyone has an IRA or 401K invested in the stock market, for those who do, the red warning light is flashing red: markets have reached historic extremes on numerous fronts.

Just like in 2000, proponents claim “this time it’s different.” Back then, the claim was that since the Internet would be growing for decades, dot-com stocks could go to the moon and beyond.

The claim the the Internet would continue growing was sound, but the prediction that this growth would drive stock valuations into a never-ending bubble was unsound.

Once again we hear reasonable-sounding claims being used to support predictions of a never-ending rise in stock valuations.

What hasn’t changed is humans are still running Wetware 1.0 which has default settings for extremes of emotion, particularly manic euphoria, running with the herd (a.k.a. FOMO, fear of missing out) and panic / fear.

Despite all the assurances to the contrary, all bubbles pop because they are based in human emotions. We attempt to rationalize them by invoking the real world, but the reality is speculative manias are manifestations of human emotions and the feedback of running in a herd of social animals.

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Anatomy of a Bubble and Crash, by Charles Hugh Smith

Bubble markets generally crash back to their point of lift off, which can mean an over 90 percent drop. From Charles Hugh Smith at oftwominds.com:

Needless to say, few are expecting bubble symmetry to manifest now, because, well, of course, “this time it’s different.” Indeed. It’s always different and yet always the same, too.

Let’s indulge in some basic logic:

1. All speculative bubbles pop, regardless of source, time or place. (100% of all historical evidence supports this.)

2. The current “Everything Bubble” is a speculative bubble.

3. Therefore the current speculative bubble will pop.

Now that we got that out of the way, the question becomes: how will the crash play out? There is no way to forecast precisely when or how the current speculative bubble will crash, but history offers a few potential templates.

The dot-com bubble offers a classic example of bubble symmetry and scale invariance. (See chart below.) Note how the bubble arose in two legs of X duration and it crashed in two symmetrical legs of X duration. In both legs, the crash returned to the same levels from which the bubble took off.

Scale invariance: this same symmetry is visible in bubbles that soar and crash in 6 days, 6 months or 6 years. The symmetry also holds whether the instrument soars from $1 to $5 or $100 to $500, or whether it is in index, commodity or equity. (See charts of Cisco Systems (CSCO) in 2000 and Tesla (TSLA) in 2020 below.)

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The Dystopian Bubble: George Orwell Meets Charles Mackay, by Kevin Duffy

It is the best of times, it is the worst of times. From Kevin Duffy at mises.org:

“Threats to freedom of speech, writing, and action, though often trivial in isolation, are cumulative in their effect and, unless checked, lead to a general disrespect for the rights of the citizen.”

~ George Orwell

In early December I asked Jim Grant how to reconcile exuberant financial markets with economic reality that reads like dystopian fiction. He responded,

I’m not sure there’s much distinction. To me, the current form of dystopia is the bubble form. So I think this is the year of the dystopian bubble.

The opening pages of the new decade feel like we’re living through a combination of George Orwell’s 1984 and Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds. On the day the 2020 election results were to be certified in the Senate, a mob from the losing side surrounded and actually breached the Capitol. The outgoing president was accused of inciting a riot, threatened with impeachment, and banned for life on Twitter. Despite the chaos, stocks shrugged it all off and rallied to new highs.

The following weekend cover of Barron’s, “The Case for Optimism,” captured the manic side of the dystopian bubble perfectly. Its editorial staff sees a silver lining in practically every cloud:

[T]his is a market determined to march higher, and it’s not about to be derailed—even by historic mayhem in the nation’s capital. Stocks are rallying on the trillions of dollars in stimulus that may only be accelerated under the new administration. A chaotic political season is winding down, while the economy is gearing up for a postpandemic reopening.

Investors need to keep their eyes forward and look ahead to a Joe Biden presidency: to more-predictable domestic policies, smoother trade relations, and additional efforts to revive the economy. Now might not be a good time to own anything defensive.

Still, Barron’s acknowledges a new set of political risks:

That’s not to say that a Washington controlled by the Democrats…will be entirely friendly to investors. The Democratic agenda includes corporate and individual tax increases, heightened regulatory oversight, and such ambitious social and economic policies as a Green New Deal, health-care reform, and student-loan forgiveness.

With bigger government on the way, what could possibly go wrong?

 

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The Biggest Thing Since 1776 is Happening NOW… How the Coronavirus Will Spark the Greater Depression, by Doug Casey

SLL agrees with Casey’s economic prognosis. From Casey at internationalman.com:

coronavirus economic depression

International Man: Panicked people are emptying supermarket shelves and stockpiling toilet paper. Hand sanitizer is impossible to find anywhere.

Is the impact of the fear and hysteria greater than the risk of the virus itself?

Doug Casey: Yes, very much so. The virus itself is what we can call a first-order effect. I don’t want to spend much time talking about the flu itself because, even though worst-case numbers like a million deaths in the US are tossed around, it’s not the biggest problem.

The second-order effects—like the economy shutting down from hysteria—are actually much more serious.

The third-order effects—new laws and state action—will have the longest-lasting consequences. We can talk about them in a minute.

As far as the virus itself is concerned, I’m sure everybody has read lots of articles and listened to podcasts from experts. So knowledge—such as it is—about the virus is fairly widespread. Except very little is certain, even now. FWIW, I say that as a lifetime science aficionado, reading in many areas of science for years.

Just in the last generation, we’ve had hantavirus, the bird flu, swine flu, Zika, West Nile, MERS, SARS, and H1N1. We’ve also had anthrax—which everybody’s forgotten about. Of course, it’s a bacterial infection as opposed to a viral one. They’ve all had their day in the dark sun of mass hysteria.

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David Stockman on the Coming Financial Panic and the 2020 Election

When the next financial crisis hits, there won’t be a central bank rescue. From David Stockman at internationalman.com:

International Man: We seem to be near the top of the “everything bubble.” Almost nothing is cheap… anywhere. What are your thoughts on where people should put their money for prudence and for profit?

David Stockman: I would recommend recognizing that the “everything bubble” is the most extreme, exaggerated, severe financial bubble in world history. It will inevitably collapse, and there will be massive losses, even greater than occurred in 2008 and 2001.

So, the first thing is to stay out of the casino. By that, I mean the financial-market stocks, bonds, and everything else.

These markets are so artificial. They’re just chasing what the central banks are doing. There’s no honest price discoveries or supply and demand; nobody’s discounting the future of economic growth, productivity, and investment. You’ve got the chart monkeys, 29-year-old day traders who are in charge of the market.

When the big correction comes, there are going to be massive losses, and the panic will be great. All correlations will go to 1—which means everything will fall: the good, the bad, and the indifferent.

There’s this old saying among traders that when the cops raid the house of ill repute, they carry out the good girls, the bad girls, and the piano player too. That’s essentially what’s going to happen.

You can’t be saved by picking high-yielding stocks or conservative blue chips or stocks that provide daily necessities like food—it doesn’t matter. Everything’s overpriced right now because of this huge financial distortion.

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