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Every Bubble Is In Search Of A Pin

The 'Everything Bubble' has popped
Friday, December 7, 2018, 6:06 PM

Now that the world’s central banking cartel is taking a long-overdue pause from printing money and handing it to the wealthy elite, the collection of asset price bubbles nested within the Everything Bubble are starting to burst. 

The cartel (especially the ECB and the Fed) is hoping it can gently deflate these bubbles it created, but that's a fantasy. Bubbles always burst badly; it's their nature to do so. Economic suffering and misery always accompany their termination.

It's said that "every bubble is in search of a pin". History certainly shows they always manage to find one.

History also shows that after the puncturing, pundits obsess over what precise pin triggered it, as if that matters.  It doesn’t, because 'cause’ of a bubble's bursting can be anything.  It can be a wayward comment by a finance minister, otherwise innocuous at any other time, that spooks a critical European bond market at exactly the right (wrong?) moment, triggering a runaway cascade.

Or it might be the routine bankruptcy of a small company that unexpectedly exposes an under-hedged counterparty, thereby setting off a chain reaction across the corporate bond market before the contagion quickly spreads into other key elements of the financial system. 

Or perhaps it will be the US Justice Department arresting a Chinese technology executive on murky, over-reaching charges to bully an ally into accepting that unilateral US sanctions are to be abided by everyone, regardless of sovereignty.

How was it that the famous Tulip Bulb bubble came to a crashing end back in the 1600’s?  No one knows the exact moment or trigger. But we can easily imagine that in some Dutch pub on the fateful night on the Feb 3rd 1637, a bidder on the most-coveted of all bulbs, the Semper Augustus, had an upset stomach and briefly grimaced when hit by a ripping gas pain:

Interpreting this face as distaste for the opening bid price, the assembled crowd may have suddenly realized the absurdity of paying so much (enough to clothe and feed a family for more than half a lifetime) for an ungrown flower. The bids were pulled, and the rest is history.

The point is: it doesn’t really matter what the pin actually is. The fatal trigger is often something completely unexpected and impossible to have predicted. So obsessing over what will end the Everything Bubble is a fool's errand.

Rather than the "pin", what's important to focus on is the "pop" -- what the aftermath will be. The duration and height of a bubble is directly correlated with the scope of the destruction its bursting will wreak, as is the number of asset classes that get caught up in the mania.

It's much wiser to spend our time focusing on where the damage is going to occur, what path it's most likely to take, and how bad the losses will be -- so that we can position ourselves accordingly in advance for safety and, for the more adventurous, profit.

We've never seen anything like the current bubble we're in. Stocks, bonds, real estate, fine art, you name it -- nearly everything has been inflated to all-time highs. When this Everything Bubble pops, the pain is going to be epically calamitous.

And it's increasingly looking like the "pop" has sounded.

Greed & Fear

Every bubble requires two essential inputs to fuel its rise:

  1. a compelling story
  2. ample credit

If either is missing, no bubble.

Price bubbles are not financial phenomenon, but rather psychological constructs born and nurtured in the human brain stem. Greed and fear -- that’s what drives bubbles.

Greed on the way up and then fear on the way down. But neither has much influence without a tempting yarn and a lot of easy credit.

Attempting To Replace The Business Cycle With A Credit Cycle

In their quest for power and glory (and accompanied by a dead-flat learning curve), the world’s central banks are now pursuing their third, largest, and most ill-considered attempt to defeat the business cycle by replacing it with a credit cycle.  The fact that the prior two credit cycles blew up spectacularly doesn't seem to be deterring them in the slightest.

A rather minor business cycle slowdown in 1994 was fought with a tidal wave of new credit under Greenspan. That ultimately resulted in the Dot Com Bubble crash of 2000, but the lesson went unlearned. 

Instead the Fed concluded that the idea was sound, but was simply not taken far enough. The elite cheerleading squad, captained by Paul Krugman, fully supported a doubling down, and the media unquestioningly went along with the program.

So Greenspan and Bernanke created the Housing Bubble 1.0 by offering the world’s credit markets a price of money so low it couldn't be refused.  Housing was the story, and the Fed supplied the credit.  As predicted by a scant few of us, that all blew up spectacularly in 2008. And no constructive lessons were drawn from that experience, either.

With the political aircover to "save the system" (from the problems that it created!), Bernanke, Yellen, Kuroda and Draghi then led the most aggressive, coordinated central bank bender in all of human history.

$Trillions and $trillions were printed up, and many times that amount were leveraged and loaned throughout the banking and speculative finance universes:

(Source)

If you can't clearly see how the above chart explains the massive price inflation over the past years in stocks, bonds and real estate, you'll have no chance of understanding what’s coming next.  Best of luck to everyone choosing to avoid paying attention to this critical information; you'll dearly need it.

Paying attention or not, here we all are; stuck together in a world awash with credit. $250 trillion in debt. 4 times that amount in unfunded liabilities. And a mind-bogglingly massive amount of tangled financial derivatives roughly the same size as both those debts and liabilities put together.

The Greed Is Now Gone

All that credit had to go somewhere. And it did.

Rare art fetched record-breaking prices. As did top-end trophy properties the world over.  Rare cars and large gemstones commanded the highest prices ever seen.  Stocks were bid up to ridiculous Price/Earnings multiples. And the Housing Bubble 2.0 returned to many metros around the globe -- housing has never been more unaffordable to more people than it is now.

Can you feel it?  How greed is now giving way to fear? 

Sure, you probably know people who are hanging onto the Wall Street marketing slogans (“Buy the dips…hang on…don’t panic…successful investors don’t sell into weakness, they buy more!”). But the party atmosphere is now over. 

Just ask anyone who bought a house in Seattle in June (now down 11%). Or FAANG stocks in July (down 20%+). Or cryptocurrencies in January (down 80%+).

We've seen more downside volatility in the financial markets this year than in all of 2012-2017.

Until and unless the central banks reverse their current tightening course, everything is headed lower.

And I mean everything.

How bad will it get?  Honestly, pretty damn bad. Worse than 2000 and worse than 2008.

The credit cycle is just that much larger this time.

It’s the airgap between the economic value added (EVA) lines below and the spiked tops above that defines the amount off pain involved in the unwinding. This chart clearly shows the reckoning is going to be on a scale we've never experienced before.

Which is why our our advice continues to be protect your money, develop all 8 Forms of resilience (especially Emotional), and prepare to be a source of support for shell-shocked neighbors and loved ones.

The "Big One" Is Here

The recent market volatility is just the beginning of the downslide.

There will be many starts and stops along the way, but coming soon will be a shock that wakes people up and scares them badly.

Perhaps it will be another institutional failure like Lehman Brothers.  Or maybe a sovereign default.  Or even a central bank failure (yeah, I’m looking at you Swiss National Bank!).

Just "printing less" is causing the major stock indexes to stumble, while plunging the peripheral emerging markets into bear market territory. 

What's going to happen when the central banking cartel is in net "money withdrawal" mode? Will today's teetering markets be able to withstand that headwind?

We won’t have to wait long to find out. We should hit that milestone in the next quarter.

For now, the Fed and ECB lack the political capital to resume printing anytime soon. The Bank of Japan hardly has the muscle to muster anything more than temporary speed bump on its wind-down. And China increasingly has less and less motivation to help the US financial elites by rescuing their markets for them.  Besides, the Chinese authorities have their own massive collapsing bubbles to contend with right now.

And to add insult to injury, recession indicators are piling up faster and faster now. 2019 is looking primed to be The Year That Mass Layoffs Returned. Should that be the case, the resultant slowdown in consumer spending is certainly not going to help matters.

Against this backdrop, how far could the markets fall from their current prices? Easily 30% to 50%. And that's if we're lucky.

In Part 2: What To Do Now That The "The Big One" Is Here, we detail out the key indicators to watch most closely to track the great unwinding ahead, so that you can stay head of events and increase your odds of positioning for safety (and profit).

Those of us who have spent the past years watching in concern as the Everything Bubble grew, this is the moment we've been anticipating. Time to put your crash plans into action.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access).

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20 Comments

sand_puppy's picture
sand_puppy
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pgp's picture
pgp
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Perspectives: The Real End is Years Away

Yep, it definitely looks like the financial bubbles have popped.  But it's interesting to note the various perspectives of the people and commentators most invested in the subject.  Those following financial events or with active money in the game see rising fear but for the masses, the middle class, with little interest in stock, bond or gold prices, anger will focus their point of view.  The anger from declining opportunity that will eventually turn to rage as financial foundations crumble.

The immediate future therefore might be about to change radically for those holding assets and living off the central banking system but for the rest of the voting population nothing much will change for years, except perhaps the rate of change itself.  The same lack of opportunity will prevail or worsen, salaries will continue to stagnate or decline, worthwhile jobs will become fewer and housing prices will drop but still be out of reach.  Food and retail choices in general will become more difficult.  Homelessness will accelerate and destitution will spread like disease through all of the classes,

Meanwhile the multinationals will continue to exist in some form or other so that enough people will keep their jobs, hold on to their mortgages, their debt and some semblance of family security.  In other words the errant global financial system will continue to tick over.  Just as it did during the Great Depression. 

The real sea-change will happen in the political system as representative parties become more and more extreme.  Though ultimately useless each new government will fail to turn things around until finally the inherent corruptions blocking justice are expunged; at the point when some form of social revolution finally develops sufficient desperation, energy and order to overthrow the imperfect ideologies that drive man's religious belief in concepts like democracy.

The real end to this socio-financial disaster is therefore decades away, the true misery just beginning.  Recovery only comes when people finally realize that governments, like all wielders of power, ultimately corrupt no matter what their constitution.  In the meantime, we should hunker down because there will be nowhere to hide in the century it will take to redefine justice and social order.

New_Life's picture
New_Life
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Examples of Bubbles...

I think it's slightly disingenuous to give examples of bubbles and not mention what happened to both Gold and Silver in the last decade....

olejniczakm's picture
olejniczakm
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End the debt cycle, do some good.

I think that we have a huge opportunity masquerading as a problem.

We have two problems: the immediate one of the everything-bubble.
The other problem the gigantic financial system that distorts not only the economy, but our politics.
So much money in the hands of so few gives them hegemoinc power over most aspects of life.

This financial bubble is an opportunity to fix this second problem using the first.

The fault of previous bubble bursts has been that the central banks bailed out the financial sector.
As Mr. Martenson has pointed out, this merely perpetuates the problem.
The solution is not to destroy the Fed, but repurpose it.

What should happen is that the Fed should allow the private financial system to totally collapse.
The Goldman Sachs of the world should be completely liquidated. 
I suspect that their resulting value would be about $0.
This would take away their economic stranglehold on our society.

But productive industries such as factories located in the US need the money markets to function.
The Fed should then use its Section 13(3) powers to set up its own money-market window
and allow these businesses to directly access Fed funds, bypassing the financial system.
Some will howl that this is socialism,
but let's face it, free-market financial capitalism is a failure.
(This Fed power should be temporary.
A well-regulated private financial system should be developed.)

This would destroy the current malignant financial system which would be a definite good.
It would remove Wall Street as a king maker in our society.
It could make the Wall Street the servant not the master of Main Street.

 

Uncletommy's picture
Uncletommy
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I think it has already been done!; Olejniczakm!

The Fed should then use its Section 13(3) powers to set up its own money-market window

and allow these businesses to directly access Fed funds, bypassing the financial system.

Some will howl that this is socialism,

but let's face it, free-market financial capitalism is a failure.

It seems somewhat ironic when pots start calling kettles black. Monopolies are the logical conclusion of vested interests. Why compete when you can just buy the competition or steal their technology using government money and resources? Being connected has its privileges! Was it China that invented gunpowder? 

https://www.forbes.com/sites/haroldfurchtgottroth/2017/05/08/chinese-government-helps-huawei-with-5g/#3a982fdd6bae 

sand_puppy's picture
sand_puppy
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Water Filters and Kerosene Stoves

I found a small family run business that sells their own brand equivalent of the Big Berkey Water Filters and filter inserts cheaper than the brand name products.

St Paul Merchantile

They also sell the Butterfly Kerosene Stove that was in common use in the USA early in the 1900, before the electrical grid was built out.  (Liquid kerosene seems more likely to be available in my imaginary lower tech future than pressurized propane--just my guess.) 

Over counter cupboards throughout our kitchen make the table top stove below impractical at our house.  They have an equivalent model with legs, and a high BTU output model for pressure canning

The Kerosene goes into the  container on the right and wicks bring it up to the flame.

Almost as interesting to me is the mention that the stoves are build to third-world standards with imperfections in the hand painting that are hard for American customers to accept.

shastatodd's picture
shastatodd
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Posts: 61
LtG

"Recovery only comes when people finally realize that governments, like all wielders of power, ultimately corrupt no matter what their constitution."

the "limits to growth" are not political. this is math and science.

Uncletommy's picture
Uncletommy
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Posts: 637
Innovative?

https://www.colemancanada.ca/en_CA/classic-2-burner-stove/3000003649.html?cgid=coleman-stovesandgrills#start=16

I've used mine for the last 40 years and have only had to siphon gas out of someones car 3 or 4 times over those years to eat warm food and can jam and tomatoes. White gas works the best but I've gotten by less quality. Kerosene? Uh, a bit pricey. I can still get parts, as well.

mjtrac's picture
mjtrac
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David Graeber's exceptionally

David Graeber's exceptionally perceptive essay has since been expanded to book form by its author: https://strikemag.org/bullshit-jobs/

An interesting question raised by your analysis, pgp, is whether corporate executive suites understand which employees actually generate wealth, and which are simply holding the positions described in the essay.  I think it's entirely possible that our existing top managers will discard the muscle and tendon and keep the pretty hair.  Of course, it's also possible that all the folks with degrees in management and grant-processing will get laid off while the factory workers stay employed. Either way, one class of people is going to be extremely unhappy.

Interesting times.

thc0655's picture
thc0655
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Drudge link

Drudge linked to ZH version of this article. That ought to garner a wide audience.

Michael_Rudmin's picture
Michael_Rudmin
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The opportunity is a problem, because...

... the people who are permitted to make decisions all have a vested interest in maintaining the banking system, even to the exclusion of everything else.  That, and for another reason:  The banking system immensely empowers war machines, and any war machine without a banking system will lose to one with a banking system.  It's main advantage is its ability to subert EVERYTHING to destroying an enemy and taking his lunch. 

To the main headline, what to do now? 

I can offer my song:

Have yourself a very little christmas,
Make it yuletide-lite!
From now on, our troubles will be....      ... outta sight!
HAve yourself a very little christmas,
As jobs all go away, now they simply legislate to make us pay!
Here we are, in great recession days, worse than depression days of yore!
A friend in need is a friend indeed, so we'll have friends galore!
Through the years, we'll share a tent together,If the law allow. 
Barack and Dubiya, please stand up and take a bow!
But have yourself a very little christmas now!

Sung with a sigh, and tongue in cheek, but... somewhat serious.
 

sand_puppy's picture
sand_puppy
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Yellow Vest Protests in Belgium and Netherlands, too

AP reported today that Yellow Vests protests have spread Belguim and the Netherlands, though are much smaller outside of France.

BRUSSELS (AP) — Belgian police fired tear gas and water cannons at yellow-vested protesters calling for the resignation of Prime Minister Charles Michel after they tried to breach a riot barricade, as the movement that started in France made its mark Saturday in Belgium and the Netherlands... around 400 protesters were gathered....

About 100 were detained, many for carrying dangerous objects like fireworks or clothing that could be used as protection in clashes with police.  [SP comment:  Apparently you are not allowed protective clothing when being beaten up by riot police.]

The reasons for the protests are not entirely clear. Neither Belgium nor the Netherlands has proposed a hike in fuel tax — the catalyst for the massive and destructive demonstrations in France in recent weeks.

Instead, protesters appeared to hail at least in part from a populist movement that is angry at government policy in general and what it sees as the widening gulf between mainstream politicians and the voters who put them in power. Some in Belgium appeared intent only on confronting police.

In the Dutch city of Rotterdam, a few hundred protesters in the high-visibility vests that have become a symbol of the movement walked peacefully across the downtown Erasmus Bridge singing a song about the Netherlands and handing flowers to passers-by.

Sisters Beb and Ieneke Lambermont, aged 76 and 67 respectively, were among them.

“Our children are hard-working people but they have to pay taxes everywhere. You can’t get housing anymore. It is not going well in Dutch society,” Ieneke said. “The social welfare net we grew up with is gone,” she said.

The government is not there for the people. It is there to protect its own interests,” she said

Michael_Rudmin's picture
Michael_Rudmin
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What if...

... we recover from this crash?

People talk about the algos taking over, let me hypothesize a second.

Suppose the ppt manages to save this one, and we recover from this crash?

We nonetheless have completed two full cycles of the three cycle triple top, which is one of the most salient features a person or computer can recognize.

So let's not forget that there are whole armies of investment people out there (bullshit jobs) whose job is to look for ways to profit handsomely, and then program the algos to carry it out.

And if there is a well financed algo out there that can shape the third shoulder, and then short sell the markets hard (possibly through VIX), then all the other algos will recognize and sell too. So will the investment bankers, and the fund managers. And the one who short sells first will be very handsomely rewarded.

Of course, the game can continue indefinitely if nobody does; but that's a perfect prisoner's dilemma, with one exception: in a normal prisoner's dilemma, you only have two or three real players. Here, you might have five hundred. Do you think that of those five hundred, NONE will try to tip the pan into their own pocket?

So any rational person out there should be noticing this, and recognize that it doesn't make sense to buy into the next rise. Yeah, most people aren't rational. And there's actually a reasonable chance that the PPT can manage to overturn even an algo. Shoot, maybe that's where all the missing pentagon trillions went. But really, I'd want to see us well past any third shoulder before I bought.

Time2help's picture
Time2help
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LesPhelps's picture
LesPhelps
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pgp wrote: The real end to
pgp wrote:

The real end to this socio-financial disaster is therefore decades away, the true misery just beginning.  Recovery only comes when people finally realize that governments, like all wielders of power, ultimately corrupt no matter what their constitution.

If this were only the mother-of-all financial bubbles, then perhaps decades before complete collapse and perhaps recovery would only require political and economic structural changes.  However, factor the size of the bubble, combined with energy, environmental and over population issues into the mix and I’m betting on a much faster collapse followed by a much longer recovery into a much lower per capita wealth society.

I’m hoping you are correct,  but not buying it.

 

olejniczakm's picture
olejniczakm
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It has been done, but in the wrong way.

Section 13(3) was used after the bursting of the 2008 bubble. 
But it was used to bail out the private financial sector.
You must admit, that sector was bailed out very completely.
This proves that Fed action is effective.
The financial sector is now back in business and doing even more damage than before.

When the next bubbles burst, we must bail out the sector that really matters.
Namely the productive sector of the economy.
To pursue a policy of leave-it-alone liquidationism will lead to a death-spiral of the productive sector.
(I may be wrong, but I assume that you would like some semblance of the productive sector to survive.)

I suspect that you would object to piling more debt on top of the already-too-high pile.
But don't forget, if we allow the private financial sector to collapse,
trillions of dollars of debt will be destroyed.
And trillions of actual dollars will disappear from that financial speculation machine too.

So yes, the agency that created the bubble, if repurposed properly,
could fix the problem it was instrumental in creating.
(As far as the Fed being a monopoly, I accept the world the way it is not how I wish it was.)

mjtrac's picture
mjtrac
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no disagreement between you and pgp?

While I can't speak for pgp, I think the main difference between you and they is a disagreement over the amount of desperation that will be required before revolution occurs.  I agree with pgp that true revolution will not happen for decades.  I probably disagree with pgp in that I don't think a true revolution will help, unless it involves a smarter species or smart aliens.  

I really thought that 2008 was the end of the existing power structure.  Eight years later and the result of a complete delegitimization of the financial system has included:

  • the bankers coming out ahead
  • the *election* of a sociopathic demagogue to the top office (to "repair" things) 
  • the knowing seating of a serial liar on the top court
  • no action on climate, if rounding error is ignored
  • identification of the scapegoats (immigrants, gays, jews, the usual suspects)

 

Time2help's picture
Time2help
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S&Pop

Assumption: Bubble to burst duration is a time measure of the masses “loss of faith” in the market.

Dot Com Bubble/Burst

• 8/2000 - 9/2002 (peak to trough)
• 25 months duration

RE Bubble/Burst

• 10/2007 - 2/2009 (peak to trough)
• 16 months duration

16/25 = 0.64 (duration reduction ratio between events)

x/16 = 0.64 (applying reduction ratio)

x = 10.2 months

Assuming bubble peaked in 9/2018 and the ratio holds, +10 months gives 7/2019…maximum economic pain just in time for the elections….

Time2help's picture
Time2help
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Les policiers en grève dès mercredi?

"Police on strike on Wednesday?" - Le Parisien

Article translation via Google Translator:

"Two unions call for "act 1" of the police sling (strike) and one of them to "close the police stations".

Two police unions are calling Monday for an "act 1" of the police sling. While law enforcement has been accumulating overtime since the Yellow Vest crisis began, the Alliance and SGP Police Unity unions have released news releases on their respective Twitter accounts.

"The police are exhausted and receive no recognition, UNIT SGP POLICE / FMSI-FO solemnly announces ACT 1 of the anger of the police" thus published the union of police labeled FO."

 

Uncletommy's picture
Uncletommy
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Posts: 637
Swallow hard, but don't choke on them!

Next few days should be expository on whether this is the case. We'll see if you're right, Dave.

Right now, we are in the middle of tax-loss-selling season. All the items which have dropped this year are under pressure, due to people selling in December in order to match off gains vs losses. Those same items will generally bounce at end of December/early January, but right now, the beaten-down stuff is being sold fairly hard. For the last few years, that has been the lot of the mining shares; this year we seem to have dodged this particular bullet.  Hmm.  Maybe that's even what is causing some of the pressure on SPX.

https://business.financialpost.com/personal-finance/taxes/time-to-sell-how-to-offset-your-gains-by-swallowing-your-losses

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