Are we in another bubble?

The cause of the GFC was that because credit was so readily given to those whom had no chance of paying it back, on the hope that their house prices would go up so they could refinance their loans with the increased equity. These sub-prime mortgages themselves were bundled into bonds at I think BBB ratings. Then you have some smart bankers packaging many of these different sub-prime bonds into a CDO, and got them rated AAA when the underlying asset class of the security was... someone who couldn't pay their home loan unless it went up in value.

That itself wasn't what caused the GFC, what caused it was that institutions all over the world bought these CDOs. When the borrowers began defaulting on their mortgages, the underlying asset of those sub-prime bonds, which were the underlying assets of the CDOs went bust. It had a global effect because everyone bought them.


The 'stock market bubble' at present is entirely different so I don't think it's really analogous to the GFC. For one, not everyone owns US stocks to the same extent that they owned the CDO's (unless I'm mistaken?). Even if many people do, it's not like Apple or Google will go bust if the stock market bursts, so institutional investors won't lose the underlying asset, which will regain its value overtime. You can see how this is radically different from the housing crisis.

The problem with the stock market is that the artificially low interest rates the Fed is maintaining (true for every Central Bank) promote excessively cheap credit. This promotes a misallocation of resources, and those who get that free credit are often large banks, large corporations, wealthy people, etc, before your average consumer. When these institutions get cheap money they typically want to invest it in capital projects. These projects increase the value of the company, which in turn raises the share price (since executives don't tend to invest in projects which generate negative value). Capital projects require additional employees which promotes employment, and those people take their wages and spend it. The classic upwards trend and 'multiplier effect'. This sounds nice, except those capital projects are a misallocation of resources, and eventually when the bust occurs liquidation of a lot of these projects and assets occurs, unemployment ensues, etc - this is because during the boom the PPF gets pushed out for both capital and consumer goods, so prima facie these companies seem justified. When the bust occurs, the capital goods remain but consumer demand recedes, and you're left with capital goods which are supposed to produce consumers goods for those consumers who just lost their jobs and are unwilling to spend. Quantitative Easing doesn't work here since it is those big players which get the money first, and they don't buy consumer goods.

Due to the misallocation of resources it must bust eventually, and that is the only reason a 'bubble' exists - the assets are being overvalued as the income they are generating based on present demand will be reduced during the bust, and so those assets too will devalue and be liquidated, causing a reduction in stock prices over and above the lack of confidence in the market.

The Q is when, and that really depends. First however, I think it is of no benefit to say that the stock market is the highest its ever been and that that's a problem. Economic growth occurs, the stock market will always be higher because of that (the underlying assets which the stocks represent are greater). The Q is how much of a premium are we paying from the proper valuation of those stocks. Also that volatility is greater in today's market I think is also of little benefit as a diagnostic symptom. The world is getting more and more competitive (so companies don't last as long as they use to), and people have access to more and more information which means stock prices are more sensitive to current events. Considering the blockbuster that was this year, volatility is to be expected, and it doesn't really change the fundamental question as to what the premium for the stock market overall is, relative to its sensible valuation.

How big an effect interest rates have is a big question. Unfortunately an interest rate rise will probably occur in conjunction with a Trump Presidency - that'll be sure to send shivers down investors spines. Anyway, people know interest rates are artificially low, and so I would hope they have been priced in by executives and investors which would mitigate the harshness of a rate rise. It also depends on how sensitive mortgage payers are to interest rate rises. Obviously a tightening up of credit means less capital projects which means less spending, less employment, less spending more, etc, and you have that classic downtrend - in the mean time companies consolidate, and those companies that weathered the storm purchase those liquidated assets (this is why a correction is vital).

Unless there are other unknown factors, the impending bust won't be as large as the GFC. It will however have enormous social ramifications, especially given the widening income inequality. You wipe off half the value of wealthy peoples assets, nothing much happens to them. What happens to the average consumer though is that they have no job, and that will feed into the social justice rhetoric in our time. From a purely economic perspective though, the stock market bubble won't hit GFC levels - to repeat during the GFC, debt went bad. Debt is simply an obligation to repay, and when people no longer want to repay, the debt vanishes. Equity is different however, because its underlying value is backed by some assets which can be liquidated. Consequently, since the stock market boom is equity-based, it's not going to be particularly bad.


Not sure why I wrote an essay...

 

Yes, we are in a bubble. What is happening, in the easiest way of explaining it is that the FED prints money and gives it to companies and corporations. These companies then go out and buy their own stocks because the CEO's bonus is based on how well the company performs on the stock market.

In countries such as Japan, it is estimated that the government owns half of the stock market.

Just look at the gold charts, they are all time highs but the mainstream media doesn't talk about gold at all and when it does it is generally negative. Every alternative media outlet with any any worth has been talking about buying gold.

This year marks the 1,000th year of money printing. If those 1,000 years have taught us anything, its that we always end up turning to gold. Despite what most people think, you do not need to have much money invested in gold or silver. Silver is a better option that gold if you don't have that much money to spend and percentage wise it will increase more than gold. Both metal prices are highly manipulated. The prices are manipulated by paper claims on the metals. For gold, there are as many as 564 paper claims on each OZ of gold. In a market crash, the paper value will go to zero and the gold price will soar.

Furthermore, countries such as Russia, China and India have been buying up the West's gold. The FED doesn't even allow anyone to know how much gold it truly has because it is a matter of 'national security' and therefore secret. Most of America's gold has probably been sold.

In short, without being too doom and gloom about it, we are headed for the biggest economic crisis we have ever had. All that happened during the 08 crisis was quantitative easing which is nothing more than money printing. Ask the Germans how printing money went for them or even the Venezuelans.

"When the social contract is broken, the people must revolt."

 

Technical Analysis says we could be.

 

It will be interesting to see how long they can keep this bubble going. But I'm more ready for it than most people.

 

Because most people spend their paper money as if it was money It is totally worthless and an increasing number of people are becoming aware of that fact.

The super wealthy have already started their investments to profit from the collapse of the next bubble. If bubble doesn't burst this year it will surely follow in the next couple of years.

Dot com bubble 1999-2001, housing bubble 2008-2011, central bank bubble = imminent.

 

This is an enormous oversimplification.

You're trying to get at the notion that fiat currency, a $100 US Note has an objective-use value of 0 (it's paper), and that it has a subjective-use value of $100 (its face value), in contrast to 'real money' such as a gold, where its subjective-use value and objective-use value always align (provided it retains its status as a media of exchange). From this does not lead to the notion that there will be a 'central bank' bubble. American fiat currency has existed for more than one hundred years; the bubble isn't because of the existence of fiat currency, but rather the central banks management of of fiat currency, and more specifically, the use of fractional-reserve banking, credit, and low interest rates. Busts can happen with gold-backed currencies as well through two of the three aforementioned mechanisms.

Also, from a more rhetorical point, if money is worthless, feel free to send me yours. Message me for my PayPal.

But yes, when people lose faith in fiat currency, it will undergo hyperinflation. That is extremely unlikely to happen with this bust. There is no viable alternative; you aren't going to be paying your credit card bills in ounces of gold. Bitcoin also isn't popular enough.

You also make the right point that other countries have moved their money out of US bonds - so the US government can't slash its debt by simply cancelling those bonds. The US Dollar will still survive after this crash though; perhaps when a gold-backed digital currency emerges will there then be a viable alternative, but cryptocurrencies haven't gone sufficiently mainstream yet.

 

Indeed it was a gross oversimplification and I agree with all of the points in the first paragraph.

I might not like or agree with the fiat system but I am certainly happy to use it. I only have 20% of my money in fiat. Everything else is divided into other investments.

Quite a few people are losing faith in fiat currency. There has been a substantial increase in gold price in the first 6 months of this year alone. Personal gold standards or gold backed cards as well as crypto backed cards exist and you can pay bills with these. Although of course at the moment I don't.

The central banks are still backed by gold. The only thing that has changed is the amount of debt leveraged on that gold. I hope this digitally gold backed currency isn't from a centralised institution. A lot will survive this crash. We will continue to have major crashes every 7 years - 10 years until people start waking up. But as long as there is food on the table and entertainment. The average person doesn't care

 

Indeed it was a gross oversimplification and I agree with all of the points in the first paragraph.

I might not like or agree with the fiat system but I am certainly happy to use it. I only have 20% of my money in fiat. Everything else is divided into other investments.

Quite a few people are losing faith in fiat currency. There has been a substantial increase in gold price in the first 6 months of this year alone. Personal gold standards or gold backed cards as well as crypto backed cards exist and you can pay bills with these. Although of course at the moment I don't.

The central banks are still backed by gold. The only thing that has changed is the amount of debt leveraged on that gold. I hope this digitally gold backed currency isn't from a centralised institution. A lot will survive this crash. We will continue to have major crashes every 7 years - 10 years until people start waking up. But as long as there is food on the table and entertainment. The average person doesn't care

 

this isnt technical analysis, this is googling "chart that shows imminent recession." you can equally easily google "chart that shows imminent bull market" and find charts based on past trends that show the opposite. the huge assumption here, and in most posts you'll read about this topic, is that past experiences signal something about future responses. i'm not convinced that is true in this case. i think the world is fundamentally different than it was ten years ago and using that data to approximate for the future is risky business

ot: interesting question for sure, and my feelings are somewhat abstract. there are probably bubbles bursting and forming all the time, but it's more a question of whether or not this bubble is relevant bubble to the economy as a whole. i don't think the current state of affairs is in that place, but that's not based on substantial analysis. feel free to disagree/rebuke. for what it's worth, i'm still long the same set of investments i was 9 months ago, and i don't plan on exiting them any time soon due to fear of the economy collapsing