Some comments on yesterday’s article, “bubbles burst all the time….”

I received a lot of comments about yesterday’s article, Bubbles burst all the time, but the alt-financial media have you looking in the wrong places. Most of them expressed disbelief, but some agreed. I wanted to address many of the comments and expand on some of my thoughts.

Could the Dow hit 40,000?

I used Dow 40,000 as an example of what we could expect as one of the unanticipated outcomes and consequences of the unprecedented central bank monetary policy accommodation and global fiscal deficit spending programs. As we can see from the chart below, global money supply continues to grow in aggregate and its growth rate continues to accelerate.

M3 total money supply continues to grow and its rate of growth is accelerating. This is the largest single reason why asset prices continue to climb

The money supply has been growing at an ever increasing rate for a long time. For example, M3 money supply for the OECD nations has grown by almost 20% since the Q3 of 2015. How can you overcome this and survive? Acquire assets.

By the way, if the Dow rose another 57% we would hit Dow 40,000. I am not telling you that it will hit that number, but imagine all that sovereign debt issuance over the next several years. These securities essentially become leverageable instruments. If we contemplate a strong dollar and an ever increasing money supply, I see it as a distinct possibility.

Think outside the box; the entire spectrum of the alt-financial media and much of the mainstream business media are predicting a bear market and a recession. By default, I take the contra. I have never seen a more predicted stock market crash as I do now, and when have the economists’ consensus ever been right?

Why are the cryptocurrencies falling?

Pride goeth before destruction, and an haughty spirit before a fall.

Proverbs 16:18 (KJV)

We never fully know until after the fact, but it seems the cryptocurrency craze was a pure bubble; plain and simple and I advised my subscribers to trade it as if it were one. Here are a number of reasons why I thought prices were going to drop.

The market participants – The composition of the market participants in last year’s market blow-off top were different than from years past.

We began to invest in June and July of 2017, just before their parabolic rise and could be considered like the rest of the lot. In previous boom cycles, the pool of investors were much more demographically homogeneous and the amounts of money were only several billion. The last bubble mostly involved the ignorant FOMO money and that amounted to hundreds of billions. We now have an entire population who lost great amounts of wealth and were essentially scammed by crypto insiders like Ronnie Moas, Charlie Lee, Roger Ver, and Craig Wright. None of these people have any introspection and are unapologetic in their actions. But an entire population have been permanently repulsed by cryptos.

The technology – I have not seen any real technological advancements in the underpinnings of these cryptocurrencies for at least several years. Their lack of consensus is a real fundamental problem. Moreover, they are not as decentralized as previously thought and the scammers have drained untold billions from the unwitting market participants. The blockchain technology still has years to go before it is ready for prime time.

The market psychology – The worst aspect about the current mindset of the bitcoin phenomenon is that the investors are still wildly bullish. The crypto craze perfectly demonstrates investor confirmation bias and backfire effect in action. The pool of cryptocurrency holders are unrelenting and unrepentantly bullish. Moreover, they bought based on FOMO, they refuse to listen to anything that might be adverse (FUD), and they buy according to social media consensus. It is a toxic combination and these investors are easily parted with their money.

Overconfidence bias – Large and small investors who made a lot of money initially quickly developed the overconfidence bias and adjusted their lifestyles upward as if this money would continue to roll in. We remember the stories of all those bitcoin millionaires buying sports cars, houses, and taking exotic vacations. Recall all those blockchain cruises. If these investors did not sell their cryptos to fund their lifestyles then they went into debt. As prices fall, their personal balance sheets dwindle and they are forced to unload many of the items they bought. The need to repay debt becomes urgent and their main source of wealth, their cryptos, need to be liquidated.

Essentially, these people need to be punished for their investment transgressions. This has nothing to do with karma, but rather it is necessary by definition. This dynamic was common and helped to facilitate and reinforce the collapse of the dot.com stocks in 2000 and housing in 2008. This is just the normal course of action.

Remember this well; regardless of how well you do in life, always remain humble. Pride always precedes a fall.

This is why I say we have more downward price action. It has to wash out.

Will housing prices crash?

Contemplate the recent changes to the supply/demand equation of the global housing market.

  • Look at the money growth chart above. Increasing money supply growth is chasing limited housing stock.
  • Remember the new private equity money that has entered the single-family residential housing market. This is permanent.
  • There has been a dearth of new housing stock supply. Much of the working- class housing stock becomes functionally obsolete over time and needs to be replaced on a continual basis. This is not happening anymore.
  • Mass immigration into the developed nations has strained available resources and is driving up rents rolls. This supports house prices as rent equivalents drive asset values.

House prices may roll with the asset cycles, but as long as monetary policies remain accommodative and the governments spend like drunken sailors I am never going to predict a wholesale long-term drop.

As always, contact me with any questions, thoughts, or concerns.