The Care and Feeding of Bubbles

Miles Franklin sponsored this article by Gary Christenson. The opinions are his.

Breaking news:  The DOW rose 846 for the week ending February 7. This week included more of the same – new index highs, political nonsense, more QE, and desperate central banks levitating markets to prevent bubble implosions.

Oops, the coronavirus expanded into a bubble of illness and deaths. Like all bubbles, financial or otherwise, this one will expand, burst, collapse and cause collateral damage. When will the “everything” bubble collapse? When will the coronavirus be contained? How much damage will these bubbles inflict upon the economy, people and personal savings? We don’t know. Stay tuned.

BUBBLES IN THE PAST—WHAT HAPPENED? (weekly data)

Market                Low         Date           High      Date    Subsequent Loss

NASDAQ 100    956       Jan. 1998     4,691       Mar. 2000         82%

Silver                   6         Jan. 1979          50*      Jan. 1980          89%

Bitcoin                 30       June 2011  19,343       Dec. 2017         69%

Deutsche Bank    25       Mar. 2003        111       May 2007          84%

Microsoft             10       Dec. 1997         37       Dec. 1999         62%

Dow in 1929      137       Apr. 1926        380       Aug. 1929         89%

Crude Oil             53       Jan. 2007        145       July. 2008         75%

Palladium          180       Feb. 2005        572       Feb. 2008         71%

JDSU                  70       Oct. 1998     1,200       Mar. 2000         100%

Apple                  0.41    Dec. 1997        4.30     Mar. 2000         79%

*Daily high

GRAPHS –EXAMPLES OF PAST BUBBLES AND COLLAPSES

GRAPHS –EXAMPLES OF CURRENT BUBBLES AND COMING COLLAPSES

WHY DO BUBBLES HAPPEN?

Bubbles expand for many reasons, but they always include:

a. TOO MUCH EASY CREDIT. Examples: Central bank levitations via massive QE, fractional reserve commercial banking, leverage in futures markets, and margin loans for stocks.

b. COMPELLING STORIES WE WANT TO BELIEVE. Examples: House prices always go up, the Fed has our back, the Greenspan put, the Powell put, a strong economy, we owe the debt to ourselves, unlimited potential with internet stocks, more eyeballs mean huge profits, tax the rich, global warming, lots of cash on the sidelines, fear of missing out (FOMO), low interest rates forever, government stimulus, shovel ready projects, necessary wars, anonymous crypto currencies, the damage will be contained, the virus will not spread… and the beat goes on, but it’s mostly false.

“Find the Trend Whose Premise is False and Bet Against It.”

• Continual growth on a finite planet. Obviously false. Trouble coming.

• Debt and deficits don’t matter – they can always grow larger. Clearly false. Hyperinflation anyone?

• The Fed will digitally create trillions of currency units with minimal long-term consequences. Not true.

• The shale oil boom produces no profits while creating massive and expanding debt. What could go wrong?

Read: Charles Hugh Smith “The Pandemic Isn’t Ending”

“The more authorities try to mask reality to maintain confidence, the more they destroy credibility, confidence, trust and faith. Once these intangibles are lost, the loss of confidence is self-reinforcing.

Depression isn’t just an economic number. It’s a self-reinforcing loss of confidence. Do you really think quarantining 400 million people will stop the pandemic?”

CONCLUSIONS:

• Bubbles always implode. Many bubbles exist now in early 2020. Expect implosions. There will be collateral damage.

• The Fed and other central banks blow bubbles by creating excessive credit—new currency units—and manipulating interest rates too low via their central planning. When has central planning by a team of bureaucrats (or economists) worked well for anyone but the political and financial elite?

• The coronavirus pandemic will have direct and secondary consequences for individuals, countries, markets and economies. The risk of bubble implosions will increase. Coronavirus consequences could be the “pin” that pops many bubbles. The virus will be used as a believable scapegoat for a stock market crash, currency weakness and failing central bank policies.

• Ayn Rand: “We can ignore reality, but we can’t ignore the consequences of ignoring reality.”  We can ignore bubbles and pandemics, but we can’t ignore the consequences of bubbles and pandemics.

• Gold will be the “last man standing.” Central banks, “inflate or die” policies, and their fake currencies cannot protect markets from a spreading virus, shale oil depletion rates, overwhelming debt, ever-increasing losses, diminishing solar output, unwise governments, failed banking policies, environmental destruction, and expensive wars.

Miles Franklin will sell gold and silver in exchange for fiat currency units that devalue every year. Bubble implosions will increase global demand for real money—gold and silver. Protect your savings and net worth with real money.

Gary Christenson

The Deviant Investor