Bubble in Bubble Calling Still Bubbly


Back in 2012 on MarketWatch I said I thought the next bubble would be in talking about bubbles. I’ve been proven to be pretty right. I still find all sorts of bubble talk online, in the press and even among some publicity seeking analysts and money managers. They’ve been wrong for about 8 years now and they might be wrong a lot longer. 

Here a Bubble, There a Bubble, Everywhere a Bubble

There’s a bubble in credit. Not just any credit, all credit from car loans to student loans to loans for stuff we don’t need. And a bubble in China real estate. There’s a huge potentially globally destructive bubble in Canadian real estate that’s for sure about to pop (at least in one province) for a couple years now. U.S. stocks are for sure in a bubble. And bonds too. There’s a passive indexing bubble that makes those last two bubbles worse.

Don’t forget the bubbles in U.S. commercial real estate (even though there’s no vacancies) and tech startups (you know where all economic progress since the early 1990s has come from). And please don’t overlook the new housing bubble, the healthcare bubble, the education bubble and the fake news bubble. 

There’s the banking bubble, the derivatives bubble, the emerging markets bubble and the commodities bubble. There’s a huge bubble in wine and art, but I don’t think that’s bad because you can always drink the wine while you look at your art. Heck, now that I’m listing all of these bubbles, there must just be a bubble in money altogether to make all these bubbles. That reminds me, there’s a bubble in the dollar. And the Yen. And the Swiss Franc. 

There’s a bubble in news coverage of Donald Trump and that can’t be good. There’s a bubble in unhappiness due to listening to too much talk radio, so that’s two bubbles in one when you include the talk radio bubble. There’s a bubble in living in mom and dad’s basement and eating out. There’s even a bubble in playing video games which is turning younger people’s brains to mush, because Pong and Atari couldn’t do it then, but WoW and Assassin’s Creed are doing it now (for the record, Assassin’s Creed is wicked fun).

I’m pretty sure there’s a bubble in bubbles. There is no other way to maybe have this many bubbles if it’s either not mostly true or not mostly untrue. How can we really tell? That’s the tough question isn’t it. Well, I think I have a clue.

Where’s the Bubble Bar?

Back in 2007 when the financial crisis was just starting – the Bear Stearns fund collapses were the harbinger ignored around the world  – we were running into what would turn into a liquidity crisis. So much debt was about to implode that liquidity was about to get sucked out of the system. It was for all intents and purposes a historic once in a century financial bubble. If you don’t understand that yet, please read The Big Short or at least watch this clip:

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https://youtu.be/vgqG3ITMv1Q

Today, we are still reeling psychologically from that crisis. Baby boomers who needed money to retire stayed so conservative with their investments the past 8 years that they still don’t have enough to retire. Yes, most will retire by age 70, but they will be stuck. Eventually a lot of them will end up living with their kids, but that’s not a bubble, that’s payback. Unless of course we think it’s a bubble in old broke people, but we’ve always had that because we’re really not as nice as we should be.

A financial bubble in its simplest terms is when the economy overheats based on borrowing that can’t be repaid. And yes, we’re on that path, but we’re not anywhere close to having another 2008. That could change of course. We could do something really stupid like cut taxes, reduce regulation and spend a lot of money we don’t have to pull growth forward leaving a big hole in the future, so that future wouldn’t be able to service the debts that are coming. We wouldn’t do that, would we?

Why do I say we’re not close to a real financial bubble? Because there’s so much damn money in the world post QE in the U.S. and still QE in Europe and Japan and China that the nominal number for bubbles are much higher today than a decade ago. Think of it this way, from what I’m reading there’s been like $15 trillion created in the past 8 years through QE. There’s probably been some helicopter money we were lied to about too.

Take all that new money and lever it up 2x. That’s two U.S. economies created by central banks. The leverage is more than 2x of course, but who is the money owed to? Freaking nobody. You know why, because when that money comes due, that’s when we’ll finally do mass helicopter money and the vaunted global financial reset that pointy hat folks have been chanting about for years now.

A lot of people can’t figure out why all that money hasn’t created inflation. Well, it has. Take a look at asset prices. That’s where all the money is flowing. It should be flowing into wages so we had less wealth inequality but for the 3rd time in my lifetime the corporate elites are proving to be pretty unethical again. There’s so much hoarding by the wealthy that’s what the other 99% are feeling even if they can’t all quite figure it out, leading about half to vote for tax cuts for the richest 1% hoping to get some trickle down on them. 

The big offset to all the new money is aging demographics which is very deflationary. That’s why all the money printing was needed. We’re not just filling the damage from the financial crisis, we’re filling the hole of people getting older – no that’s not meant to be a grave analogy, but if it were, it wasn’t bad. For the next 30-40 years the planet’s average age is going to rise a lot. Not just based on living longer, but on more people living longer than babies being born. 

I’ve heard people say we should have more babies. NO! Damit, cut that out. We have plenty of people. The alternative to more babies is printing more money. That’s a better option. Ask Keynes, he got rich twice after all. 

Sigh, It’s Probably Not a Bubble

So, did you get that? We’re not in a bubble – YET – because there’s been so much money printed that there is almost no chance a liquidity event of any significance anytime soon, unless of course we screw up as described above with deregulation, lower taxes for the rich and even more deficit spending. 

Now, let me be clear here just in case you haven’t read me before. I think the overall U.S. stock market is overvalued by 20-30% and it makes sense we see a correction this year or next, or last year but that didn’t happen. There’s still some value priced growth stocks though and I like those. If you read me, you know what some of those are. Mmmm, value plus growth plus price momentum, oh my.

We’re going to see another bubble, but it’s not close. The next recession will cause the bubble callers to claim victory, but it’ll be pyrrhic or whatever a good word is for fake. The next correction is just a correction. Sort of like the flash crash of August 24th, 2015 when the market dropped over 9% in 20 minutes but came raging back and recaptured it all within a few weeks. 

I think that next correction is coming soon. Maybe we’ll get a flash crash this summer, maybe not, but maybe. If so, have a few limit orders set to buy quality stuff. I really think we’ll get a shallow recession next year early before the dumb, but likely tax cuts take hold. That’ll maybe get the froth out of the market. 

Here’s the thing, THERE’S SO MUCH MONEY that the correction will be short lived. Money that’s sitting on bank balance sheets, corporate coffers, money markets and under mattresses will find a home in assets and lending, quickly. The next one, ain’t the big one. 

The big one is coming of course. Sometime in the 2020s or 2030s we will see Japan finally have to ask for help with all their aged people and no growth economy. That will probably set off a storm. We could see China have an actual recession, that would be pretty bad. Europe is going to have to grapple with a combination of age, tax evasion in the south, no more oil money in the north, a lot of unpaid for social programs and generally pissed off Germans who are pissed off because nobody is as sensible and hardworking as them (my tongue is in cheek, or is it?). 

Yeah, the big one is coming, but not this decade. Get ready to invest on whatever corrections we get, because there’s a lot of money out there and you want some of it. Raise cash slowly and don’t be a gambler. Trade less, own higher quality, forget the S&P 500 (SPY) and look to the Nasdaq 100 (QQQ) and find a few small companies with developing profitability that might become big companies. 

Have a great weekend,

Kirk

 

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