We live in an interesting world from all aspects. Whether it be socially, politically, or financially, never before in history has the world been at such divides, nor extremes. We could go on a rant from here regarding the social/political situations but that would be fruitless, seeing how most minds are already made up and set in cement.
Looking at the financial aspect, never before has the entire world been engulfed in such extreme valuation levels. Yes, there have been “regions” or individual episodes where bubbles formed and then popped, but never the entire globe. The Tulip bubble, South Sea bubble, and 1929 immediately come to mind, but none of these totally engulfed the entire world...and, they ALL occurred while the currency was still real.
Today, nowhere on the planet will you find a currency backed by anything real. Instead, all currencies are “backed” by the full faith and “good credit” of their issuers. This is bubble number one in my mind, and the real reason asset bubbles have extended to the levels they have. You see, ALL currencies today are credit based, meaning new currency or money supply is brought forth by the creation of new credit. Printing as was done in the old days is now too slow and cumbersome. $trillions in a millisecond with the push of a button, is today’s method. The old way of having to mine real money first in order to issue new currency has gone the way of dinosaurs.
ASSET BUBBLES DEPENDENT ON CREDIT
Asset bubbles can never occur without sufficient fuel to stoke the inflationary fires. This is exactly what asset bubbles are, inflationary events. Always, as asset bubbles begin and grow to the sky, they are not called “inflation” because people feel good about their newfound wealth. Rarely if ever, will a populace complain about asset prices going to the moon because they view their good fortune as the fruits of how smart and deft their investment strategy was. Only when goods themselves explode in price and the costs to live life itself becomes pinched, will you ever hear that inflation is a bad thing. Ultimately, the inflation works its way into the cost of production, corporations then feel the hit of compressed margins which means less profit and lower stock prices.
Money supply, and in today’s world, credit growth, is that fuel. Please note that the initial liftoff in monetary base began exactly in August 1971 (and has now gone ballistic), as the US defaulted on gold backing per the Bretton Woods agreement.
The result has been an asset inflation since the “lows” in 1982 with spikes and crashes along the way culminating in what we have today. Interest rates are at 5,000 year lows. Put another way, debt instruments (bonds) are priced at levels that humanity has never seen. To illustrate, all one needs to look at are “negative interest rates”...how is this possible? Negative rates are in fact THE BUBBLE EXTRAORDINAIRE! It is important to understand this aspect because the use of all this debt has been the money, or the fuel to push equities and real estate into the stratosphere.
Before the love affair with debt began, equities generally peaked at 16 times earnings and would become raging buys at 8 times earnings or less. While watching CNBC last week I had to chuckle when a household name company was called ‘very cheap’ at 52 times earnings. In fact, no matter what metric you want to use, whether it be price to book, PE ratio, EBITDA, price to cash flow etc., equities have never been this overvalued including 1929, 1987 and the crazy days of the Dotcom bubble. Never!
LOOMING CRISIS AND TOO MUCH DEBT
Real Estate exhibits the same lunacy, current pricing cannot be justified on any basis except one. Credit and money itself to build or buy is almost free, so compared to basically zeroed out interest rates, you will be told real estate is “cheap”. I wonder how that will work out (especially in the US) once the CDC Covid19 moratorium on foreclosures and evictions is lifted? I would imagine we will very soon see a flood of new supply, and at fire sale pricing!
The bubble is not limited to credit/currency, equities, and real estate. We now have a new asset class of “NFT’s” (non fungible tokens). These beauties are basically “stuff” you cannot ever see nor touch and some of the pricing has been hilarious. Among NFT’s, we can place digital currencies like bitcoin, Ethereum etc., we also watched as empty canvasses, non existent music and most recently a woman’s “love” have been priced in the many thousands or even hundreds of thousands of dollars! Really?
Prior to the Dotcom bubble, none of what has transpired since, could have been imagined. $1.4 quadrillion (yes, with a Q!) of derivatives outstanding? $360 trillion worth of debt? Negative interest rates? Stocks with zero earnings moving up 10-fold in only a few days’ time? Oil trading to a price of negative $44 per barrel? The average sovereign treasury owing more than 100% of GDP? In what world does any of this make sense? Only in a world where debt has become so pervasive, it engulfs everything you touch, look at, or even think about. In a nutshell, TOO MUCH DEBT IS THE HEART OF THE PROBLEM!
Gold and silver are no one’s promise or liability, they are simply proof that labor, capital, and equipment have already been used to create the coin or bar. If you knew the markets would crash tomorrow, “cash” would be the best place to be. But in a world consumed by debt and the currencies themselves backed by debt, wouldn’t choosing “cash” that cannot bankrupt be the correct answer?
The coming burst is systemically dangerous for several reasons. First and foremost, currencies themselves will collapse and lose purchasing power because they are credit based. A collapse in credit will affect everything you own (or think you do) as banks, brokers, insurance companies, and even sovereign treasuries/central banks themselves cannot survive without credit. Bluntly, when credit becomes impaired, so does our entire way of life!
Next, when the bubble bursts there will be huge social ramifications. Do you think homelessness is a problem now? Just wait! Just wait until the average person finds out their 401K has dropped 50% or much more in value? Wait until people find out their savings in banks has lost copious amounts of purchasing power, or is unavailable due to a “bank holiday”? Or better yet, since goods do not grow on grocery store shelves without the use of credit to produce/manufacture/distribute, what do you suppose the reaction will be when the shelves are bare? I suppose you could simply look at Venezuela as a guide?
WHEN THE BUBBLE BURSTS
If you don’t believe the above is possible, please ask yourself a few questions? Is the government broke? 95% of you will say yes, with the vast majority saying “but it doesn’t matter until it does”. Are we as a nation, or even a world, more divided now than ever before? Whether it be political, religious, or social views? And now, you can even throw in the new “vaccinated versus unvaccinated” views.
My point is this, the pot is boiling and spilling over from time to time, and this during supposed “good times”. What do you suppose will happen when the Everything Bubble bursts, which it mathematically will? The bubble is not just financial. We are living through a bubble of misinformation and lies. Criminal behaviour, not just on the streets but also in all markets, governments and even the courts themselves. Historians will look back upon today and wonder what we could have possibly been thinking? It will be like after WWII when people wondered how the German people could have allowed the atrocities while sitting idle? If you are someone who still has common sense, good ethics and the ability to use logic and critically think, then it’s a pretty good bet you now understand what and how it was done. It is not like you have not been warned, you have been told for several years now by the elite we are headed for a “reset”. You should believe them! EG