Blowing Bubbles for Fun and Profit, by Gary Christenson

Bubbles, like a cocaine high, are fun while they last. History confirms that bubbles and cocaine are enjoyable, because central banks blow many bubbles and the U.S. imports a large quantity of cocaine.

Bubbles are fun, but they extract a price. There is no free lunch.

Examples:

2019: The Everything Bubble.

It hasn’t crashed yet, but there are many bubble piercing objects on the horizon. Prepare for the implosion; it’s coming.

2008: The Housing Bubble.

Real estate mortgages, collateralized debt and other derivatives nearly crashed the global financial system. The official story claims emergency central banking measures saved it. But 8.7 million Americans lost their jobs, bankers foreclosed on 10 million American homes, and the DOJ prosecuted no bankers for fraud. Congress and The Fed saved Wall Street banks and bonuses…

The Fed showered $16 trillion (per the limited audit) in secret bailouts, loans, swaps and giveaways onto Wall Street and foreign banks. Another report (Wall Street on Parade) claims the total was $29 trillion. Regardless, a huge bailout worked once, so we could see a larger bailout when “the everything” bubble crashes. Debt (leverage) is larger than in 2008, and more sectors of the economy are dangerously inflated. The debt and credit monsters have grown.

2000: Internet Stocks Bubble.

The high-flying NASDAQ 100 soared from under 400 in 1994 to over 4,800 in 2000. Then it collapsed more than 80%. How many retirements and portfolios were devastated by investors arriving late to the casino? Most people failed to exit before the crash.

Blowing bubbles is profitable for Wall Street and the stock market, which is primarily owned by the upper few percent of the financial and political elite. The lower 90% have benefited little. Wages are higher but the cost of living has increased even more. Flawed (understated) government inflation statistics show the average wage earner lost ground in the last several decades. Real statistics would show larger losses. However, wealth increased for the upper 1%.

A close up of a piece of paper Description automatically generated

Blowing bubbles is fun for the participants and profitable for a few until the bubble crashes.

From Wall Street on Parade:

“Wall Street on Parade is not buying the narrative that the $3 trillion that the New York Fed has pumped out to the trading houses on Wall Street since September 17 is part of routine open market operations that the Fed is legally allowed to do.”

The United States should have allowed banks to fail in 2008. Perhaps the U.S. should allow banks to fail in 2019 instead of creating $3 trillion or $30 trillion (QE plus “not QE”) and devaluing existing dollars.

SO WHAT?

Bail out several banks, print $10 or $50 trillion… so what? Consider:

  1. Moral hazard. Wall Street takes risks, increases profits, boosts bonuses, and lets the taxpayers suffer if the bets in the Wall Street casino go bad.
  2. More debt: History shows that excessive debt leads to disaster. It will not be different this time.
  3. More dollars in circulation push consumer prices higher.
  4. Larger bubbles: The 2008 bubble was larger and more destructive than the 2000 bubble. Expect the 2020-2024 bubble implosion to create more damage than the 2008 crash.
  5. Poor and middle-class Americans are hurt worse than the political and financial elite. Imploding bubbles, diminished savings, lost jobs and foreclosed homes devastate many. Fudged statistics and payoffs to Wall Street reduce trust in government.
  6. Privatize profits but socialize losses. Wall Street might have said, “Let the taxpayers pay for Wall Street bonuses and failed gambles.”

From Alasdair Macleod:

“With annual debt payments already accounting for most of the US budget deficit and that deficit getting larger, any rise in dollar interest rates would be ruinous for federal government finances. Eurozone governments are in a similarly precarious financial position. Governments are ensnared in a classic debt trap.”

A credit excess inflates bubbles. Debt increases. The leverage makes a few wealthy and crushes many. The assets disappear, but debt remains. Someone pays interest on the debt. The bubble seldom increases productivity or real wealth.

A good example of a current bubble is sovereign debt. Why loan currency units to a government that must borrow to repay past debt plus interest? They roll over the original debt and never extinguish it. This nonsense can’t continue forever, so many will suffer when the defaults occur. Speculation and front running partially explain the craziness.

From Alasdair Macleod:

“An estimated $17 trillion of global bonds are negative yielding, which is unprecedented. This is a market distortion so extreme that it cannot be normalized without widespread financial disruption and debtor destruction. There is no exit from this condition.”

Repeat: “There is no exit from this condition.”

From Sven Henrich (tweet):

“Central banks are the enablers of the largest debt expansion in human history and insist on perpetuating what Jay Powell has called an unsustainable path.”

From Mish Talk: “$250 Trillion in Global Debt: How Can That Be Paid Back?”

“The answer is of course: It won’t be paid back. And since every debt is someone else’s asset, you can imagine what that ultimately means. A great many people are a lot less wealthy than they think. It is all phantom wealth that can disappear in an eyeblink.” [Pater Tenebrarum]

Repeat: “It is all phantom wealth that can disappear in an eyeblink.”

That explains the Fed’s need to create $trillions in “printed” currency units—they must delay imploding the bubble. You can run, but you can’t hide. You can delay the inevitable, but you can’t prevent it. Bubbles will implode.

From Martin Armstrong: Custodial Risk in New York City:

“Suffice to say that the negative-yielding bonds are going to crash like something not witnessed since 1931. While a complete default is not likely prior to 2025/2026, we are going to witness the start of the collapse in 2020.”

The “plan” is INFLATE OR DIE! Then (speculating) “extend and pretend” for another eleven months, drop interest rates to near zero, reelect President Trump, and let stocks and sovereign debt implode after the 2020 election. Fiat currencies will crash in purchasing power and congress will seek someone to blame as a distraction. Suggestions for blame:

  1. China
  2. Russia
  3. The other political party
  4. High frequency trading
  5. The latest war
  6. European banks
  7. Impeachment proceedings
  8. Climate change

Not on the “blame” list (but should be):

  1. The Fed
  2. Congress
  3. Excessive spending
  4. The administration
  5. Keynesian economic nonsense

From Daniel Lacalle: “The Next Wave of Debt Monetization Will Also Be A Disaster.”

“If this monetary experiment has proven anything it is that lower rates and higher liquidity are not tools to help deleverage, but to incentivize debt.”

From Christoph Gisiger:

“When it comes to science and technology, man learns, but when it comes to love, war and finance, he makes the same mistakes over and over again.” [Bill Bonner quote]

“At the end of the day, central banks are not all powerful. They are not immune to the laws of economics.” [An important stimulus for the current bubbles is the mistaken belief that The Fed is powerful enough to inflate the bubbles further and prevent a crash. Wrong in the past, wrong now, and wrong in the future…]

“My thesis is that when this bubble bursts, gold should rally, while bonds and stocks should crash.”

A Thought Experiment:

In round numbers, global debt has expanded by $82 trillion from $173 trillion to $255 trillion in the past 11 years. In that time global gold reserves have increased by 30,000 to 35,000 tons, or by about one billion ounces. If that new debt had been backed by gold, it would have required a gold price of $80,000.

The price of gold is about $1,500, less than 2% of what would be necessary to back the global debt increase since 2008. The world has a global debt problem.

This suggests the banking cartel created too much debt (a bubble!) and the price of gold is too low in our debt-driven economy. The crash of “the everything” bubble will reset stock and bond prices lower, and gold prices higher—perhaps to $5,000 to $10,000 during the next decade.

A western central banker might see it differently; gold is useless, and no amount of debt is excessive. Time will show this viewpoint is nonsense.

From Bob Moriarty: (on the Daily Sentiment Index)

“As of November 18th, sentiment for the S&P futures and the Nasdaq Index is approaching nosebleed territory… The DSI at 90 for the S&P and 91 for the Nasdaq Index suggests a top is coming soon. Not today but soon.”

CONCLUSIONS:
  • Global debt exceeds $250 trillion. Much of it will not be repaid.
  • Bubbles are fun while they last. But they always implode and leave many in tears.
  • Inflate or die!
  • The reset will be near when the mainstream media screams accusations at obvious scapegoats.
  • Sentiment suggests a stock market top is close. Watch out below.
  • Negative interest rates are a central bank created trap (black hole). Expect massive losses in sovereign bonds – someday soon.
  • Gold prices, compared to new debt since the 2008 crash, are far too low. Expect a significant price rise in 2020 – 2024 as financial conditions deteriorate.

Gary Christenson

(Editor of The Deviant Investor)




10 Comments

  1. People need Food, Water and Shelter. Survivalblog recommends tangible investments >too, as Stock Market ‘bubbles’ ~ will pop periodically. Paying-off a house mortgage early is a safe investment [Warren Buffett owns his house].

    People should do some reading about the Stock Market, before investing; Price to Earning Ratios, Book Values, and Dividend Rates. For example: “Despite climbing to a market capitalization above $800 billion, with over $230 billion in annual revenue, Amazon still does not pay a dividend to shareholders.” [SureDividend site 3/21/2019]

    There a lot of people that get rich by putting someone else’s money in their wallet. They rely on investor naivete. = “Bulls make money, bears make money, pigs get slaughtered” is an old Wall Street saying that warns investors against excessive greed. (From the ‘Fool’ investment site)

  2. A good article, I agree with most of what he said. But there are problems he didn’t discuss and worse he offered no solution. Government spending and debt are out of control. That is essentially because voters vote for congressmembers who bring free stuff back home. And of course congress votes to pay of influential donors and potential future employers. How do you stop that?

    The debt will cause a crash and/or a quiet but aggressive printing of money and tranches of this money being dropped off at banks and businesses too big to fail. For the little guy this means inflation. We have had inflation for decades and the government rewrites the measures of inflation so that it doesn’t qualify. But we all pay the higher prices for everyday goods and services and know the official inflation numbers are a lie. But with a real crash inflation will be much bigger and much more difficult to hide.

    We all know or can surmise what the effects will be from a real crash, something along the lines of 1929 through 1941. If that happens it will be a disaster of biblical proportions. Partly because our ancestors of 1929 were much stronger and better equipped mentally to deal with the great depression. Back then close to 50% of Americans lived on or had close ties to family who lived on the land. Today most Americans live in cities and have no working knowledge of what it takes to survive in a full blown social breakdown.

    Predicting when or how this will all go down is impossible. Those who claim to have done it in the past typically predicted it every year for 20-30 years and were finally right. But predicting that some day these chickens will come home to roost is easy because someday they will. Will it be 2020? Who knows. If Bernie or Joe get elected President maybe it will. If Trump gets elected maybe it won’t.

    But it all begs the question; how do you fix this problem?

  3. Some folks have told me to stop sending articles with this kind of content…

    “The normalcy bias, or normality bias, is a belief people hold when there is a possibility of a disaster. It causes people to underestimate both the likelihood of a disaster and its possible effects, because people believe that things will always function the way things normally have functioned. This may result in situations where people fail to adequately prepare themselves for disasters, and on a larger scale, the failure of governments to include the populace in its disaster preparations. About 70% of people reportedly display normalcy bias in disasters.”

    https://en.wikipedia.org/wiki/Normalcy_bias

    Applies to economics as well…

    If someone thinks there is something wrong with the current economy, do they have some kind of cognitive distortion effecting their thought patterns???

    https://en.wikipedia.org/wiki/Cognitive_distortion

    Do economic naysayers need some kind of therapy?

    https://en.wikipedia.org/wiki/Cognitive_behavioral_therapy

  4. This article is similar to all others I have read for the last 20 years.
    The dollar is going to collapse and become worthless or hyper inflation takes hold.
    And the only strategy is owing gold or silver. My question, who are you going to trade your gold or silver to?

    And since the family farm of the 30’s is gone for all practical purpose so what happens to 200 million Americans that do not grow their own food? (Hint-total chaos).

    Again, who and where are you going to trade with?

    These type of predictions are like the book Lucifer’s Hammer that a comet smashes into the Earth, and now what do you do. Nothing.

    I for one do not believe the US ends this way in a Mad Max world
    Scenario.
    The Book of Revelation is frightening enough and I know that will happen

    1. Skip ,,,,,,among people in our group we trade with mostly silver now ,green is not accepted at the trading post , green is still around for use outside the ‘valley’ when I need to hire a chore done I expect to pay in silver rounds ,when I sell a side of beef I expect silver rounds ,we are not Amish but have (far from it) learned from them ,
      And from the lesson in Atlas Shrugged, and 1984.

      Who is John Galt? And what can you learn? And why is it important?
      We make life hard, unnecessarily.

  5. From the article: “Blowing bubbles is profitable for Wall Street and the stock market, which is primarily owned by the upper few percent of the financial and political elite.”

    Anybody who has an IRA or a 401K probably owns stocks directly or indirectly through mutual funds and ETFs. Millions of Americans are invested in Wall Street, not just a few percent of the financial and political elite.

    1. I have a 401(k) from work that is mandatory. I don’t expect to see a single penny from it.

      When the children of Israel prepared to flee Egypt, the Lord instructed them to “borrow” as much gold and silver from the Egyptian families that they could and bring it with them. They wound up wandering the desert for 40 years lugging all of that heavy metal around with them. There was nobody out there willing to trade food for their precious metals. Throughout the entire timeline of the Bible, only gold and silver is money. Why is this relevant?

  6. The whole point is DEBT. Debt is slavery, whether you are a nation or an individual. Debt is the modern chains of slavery. There is NO way to resolve the problem without substantial pain and agony on the part of us all.

    This is a spiritual battle more than a physical or financial battle. Evil rules the world and we are in it and (of it) if we are in debt. IMHO it has been the goal of the power elite, those that own and control DEBT, to destroy the idea of a Constitutional Republic since it’s inception. They have done an excellent job, BUT THEY WILL NOT PREVAIL.

  7. Once upon a time in America, we honored and rewarded the craftsman who produced our furniture and barns. Today, the pencil necked financial sharpie who trades scraps of paper or guts a Cabelas dynasty is the new robber baron.

    Does anyone really believe that when the balloon finally goes up, millions of people will stand silently on the sidewalk and watch the bankers send their henchmen to collect their pound of flesh? Do we really believe that when facing ruin, people will go easily into that good night?

    “Just months before the storming of the Bastille in 1789, everything was calm. The social order ran smoothly. The poor tipped their hats to the gentry. The middle class kept silent. The aristocracy ate cake…… The next day, the elite were being dragged through the streets by their frilly collars like common theives.”

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