
This Bubble's Got Legs - petethomas
https://www.bloomberg.com/gadfly/articles/2016-09-09/this-bubble-s-got-legs
======
cs702
According to the OP, we have a global "central-bank-led cash bubble" powered
by "an ever flowing money hose."

If you believe interest rates are being kept "artificially low" (whatever that
means) by the "money printing" of central banks like the Federal Reserve and
the Bank of Japan, then you will agree with the OP. In this view of the world,
central banks are contributing to our current economic malaise: by keeping
rates artificially low, central banks are causing asset prices to increase,
making investment in productive endeavors less profitable for businesses and
individuals.

If you believe interest rates are low primarily _because businesses and
individuals worldwide want to hoard cash_ (as a way to protect themselves
against, say, potential deflation or insufficient aggregate demand), then you
will disagree with the OP. In this view of the world, central banks are doing
everything they can to motivate businesses and individuals to invest more in
productive endeavors. Yet even when rates turn _negative_ , individuals and
businesses still want to hoard cash, as evidenced by their demand for
negative-interest instruments.[1]

[1] [http://foreignpolicy.com/2016/09/07/the-weird-new-normal-
of-...](http://foreignpolicy.com/2016/09/07/the-weird-new-normal-of-negative-
interest-rates-economics-japan-eu-draghi-yellen-central-banking/)

~~~
benmarten
I believe this is a generation thing. Generation Y grew up with so many crisis
and terror attacks, its just naturally everyone is hording their cash. Also a
lot of people want to stay independent and mobile so they are not (yet)
settling down.

~~~
kmonsen
Uh, historically the last 40 years have been pretty good. Sure it is worse
than some of the years before that (but we did not have to go to 'nam so there
is that). But historically you can't say Generation Y have had many crisis and
terror attacks. Think about people born 1900-1910, they had two world wars to
survive!

------
habosa
If you're interested in monetary policy and a fundamental analysis of the
state of money and banking in the world today, I highly recommend "The End of
Alchemy" by Mervyn King [0].

The book starts with a long history of why we have money at all, why it takes
the forms it takes, and how banks evolved into their current role. It then
goes on to describe why there is so much inherent risk in our banking system
and what we could do to reduce or eliminate it.

As someone who follows financial news but has no formal education in finance,
I found the book enlightening and extremely readable.

[0] - [https://www.amazon.com/End-Alchemy-Banking-Future-
Economy/dp...](https://www.amazon.com/End-Alchemy-Banking-Future-
Economy/dp/0393247023)

~~~
lukezaparaniuk
FYI, Mervyn King was the Governor of the Bank of England for 10 years.

------
Wildgoose
The financial problems originated with excess debt, but debts that are so
large that they cannot be paid back - will not be paid back.

Inflating assets via QE doesn't really address the real underlying problem.

The only long-term solution I have seen is Debt for Equity swaps. It won't
work everywhere, but it does help.

For example, when the Banks were technically insolvent then the opportunity
should have been taken to forcibly re-arrange their financial underpinnings
rather than shoring up the existing rickety structures by using taxpayer
monies to in effect bail out the rich.

[https://en.wikipedia.org/wiki/Debt_restructuring#Bondholder_...](https://en.wikipedia.org/wiki/Debt_restructuring#Bondholder_haircuts)

~~~
hga
_The only long-term solution I have seen is Debt for Equity swaps. It won 't
work everywhere, but it does help._

Note the US Federal government owns so much land in the Western part of the
country and Alaska that that alone _might_ allow it to get its fiscal house in
order, and could certainly help.

I mean, isn't it everyone's dream to have title to a plot of Alaskan tundra
^_^? Obviously it would be very hard to make this work, and impossible for our
current ruling class, but the raw numbers just might work out.

Otherwise you're right, it simply won't be paid back. But who knows how long
we'll be viewed as a "least worst" place to park your liquid assets?

~~~
bradleyjg
Even taking the silly assumption, for the sake of this argument, that the
federal government's finance is just like a giant household, its debt figures
are fine.

It has a debt-to-income ratio of 14.3, the highest possible credit rating, and
assets that far exceed debt. Lenders would be tripping over themselves to lend
to to such a household, and lo and behold lenders are tripping over themselves
to lend to the USG.

This dour anti-debt Puritanism is dumb enough when it comes to individuals,
but makes no sense at all when it comes to government.

~~~
carsongross
It isn't "dumb puritanism" when applied at the individual level.

The problem is private debt, particular private debt that doesn't self-
liquidate (consumption). See Steve Keen (certainly no puritan on debt) on the
distinction between public debt and private debt and its effects on the
economy.

[https://www.youtube.com/watch?v=CLplU4WdX9A](https://www.youtube.com/watch?v=CLplU4WdX9A)

~~~
hga
How much of our current Federal debt is just funding current consumption?

How much of the budget can truly be scored as investments? Perhaps not even
the bulk of student higher education loans....

~~~
carsongross
I agree entirely, but the sovereign issuing debt in it's a currency it
controls (and let us assume, push come shove, the Treasury will side with the
government over the Federal Reserve) is different than an individual taking on
debt for consumption.

Keen is very good on this and has convinced me, despite it going against my
inherent anti-debt biases.

------
steeleduncan
The graphs offered as evidence seem to have very carefully picked axes to fit
the story. e.g. looking at the first MSCI graph with the x axis extended back
to the 60s[1] it is hard to draw the same conclusions

[1]
[https://en.wikipedia.org/wiki/MSCI_World#/media/File:MSCI_Wo...](https://en.wikipedia.org/wiki/MSCI_World#/media/File:MSCI_World.png)

~~~
bogomipz
I was thinking about that as well, particularly the "complacency index." I
have never heard of this composite before, of course I am not an economist but
I do follow finance. Can anyone speak to if this is an exotic index?

~~~
soVeryTired
Banks make up dozens and dozens of these indices for marketing purposes. The
idea is that when a client trades with a broker, the broker provides "free"
research to the client as a sweetener. That research mostly consists of dodgy
trade ideas based on their proprietary "sentiment index" or whatever.

The research tends to be low quality in general. I'd guess that the
researchers are treated as a cost center rather than a source of business.

------
rtpg
So my vague understanding is that QE and stuff is technically printing money,
but the resulting money isn't really being used for anything.

Is a bubble a bubble if the extra bubbly-ness is from stuff that doesn't get
used?

EDIT: actually, answered my own question. QE raises asset prices (even if the
sellers aren't really doing anything with the money), and at one point people
will be like "wait, none of this is worth the price it's at" and then panic
(unless QE Infinity).

~~~
ddeck
QE is effectively creating money, which is then used to purchase financial
assets in the hope that the person selling it will use the proceeds for
something that is economically stimulative. It also reduces borrowing costs
along the way.

Most central banks buy government bonds. As a result of this buying, the
returns on these bonds are reduced and supposedly less attractive to the
investors that previously would have bought them (or did buy them and then
sold them to the central bank).

The issue is that an investor that previously would have bought a government
bond, doesn't suddenly decide to spend that money in the general economy
because government bond returns went down. They instead put it into other
financial assets, like corporate bonds, the stock market, or perhaps real
estate, thus driving a bubble in these asset classes.

In places like Japan, the central bank buys nearly all bonds issued by the
government (effectively financing the government deficit). This distorts
markets tremendously. Japan is the most indebted developed government in the
world with close to zero GDP growth for 20 years and yet you need to pay them
to loan them money for 10 years (i.e. negative return on their bonds).

As an investor, you currently have to pay the governments of most Western
European countries to loan them money. In Switzerland for example, if you loan
them $100 today, you'll get back $98 in 2 years and no interest. Even Spain
and Italy which are in terrible shape fiscally, have a negative return on
their 2 year bonds [1].

We now have extremely distorted markets. Heavily indebted governments around
the world are borrowing money for free, enabled by their "politically
independent" central banks. Some central banks are purchasing equities
outright (Bank of Japan announced last month they would double their
purchasing of equity ETFs).

There's also a great deal of research indicating that such QE policies
increase wealth inequality, by driving up the price of financial assets (which
are owned by the rich) and increasing the cost of living for everyone else
that needs access to these assets (rent etc.) [2]

To most laymen, the idea that creating money and buying financial assets will
somehow stimulate spending and inflation is clearly flawed. Central banks by
design however, have few other options.

[1]
[https://twitter.com/MktOutperform/status/773577673587105792](https://twitter.com/MktOutperform/status/773577673587105792)

[2] [http://www.bloomberg.com/news/articles/2016-03-10/how-
centra...](http://www.bloomberg.com/news/articles/2016-03-10/how-central-
banks-have-made-wealth-inequality-worse)

~~~
rtpg
Well TARP worked out pretty well, right?

I think there's a logic to QE in scenarios like the credit crunch, since
suddenly banks need cash and there's a bunch of illiquid assets on everyone's
balance sheets. But I do agree that owners of treasury bonds aren't really
going out and spending their proceeds at Wal-Mart for a while.

~~~
darawk
TARP was a very specific program that had very specific goals. It was strictly
intended to prevent the collapse of the banking sector, not to inflate the
economy more generally. It may have done that as a side effect, but that was
not its primary purpose.

------
mangeletti
Some background for those concerned with inflation:

The US dollar is backed first and foremost by the global reserve status of our
currency, which it became in 1971, as (probably the most important) part of
the Bretton Woods System. As long as nations need US dollars to purchase crude
oil, the US dollar will continue to be globally valuable.

Secondly, the US has a powerful military, including hundreds of essentially
forward operating bases and air fields, lying in wait, all over the world.

Third, and as a secondary property of our military and economic strength, many
countries are owed many billions of US dollars. This is because, due to the
strength of the US military, T-bills (essentially bets made on the US dollar)
are purchased by many nations. When other countries bet on the US dollar,
they're creating a vested interest in the US dollar not collapsing, which
increases the US leverage (leading to things like money printing).

None of this is meant to make you more _too_ comfortable, because, despite all
of the above, China, Russia, Libya, Iran, Brazil, South Africa, and, at times,
India, have been attempting to reduce the US dollar hegemony by creating other
means of trading oil.

For instance, Libya's late leader, Muammar Gaddafi, created a gold backed
currency for trading oil (this is the reason NATO invaded Libya and killed
Gaddafi). Russia and Iran made agreements to trade food (from Russia) for Oil
(from Iran), which Russia would then add to its exports, acting as a trade
proxy for Iran. This, combined with Iran's efforts to pipe natural gas and oil
to China, is the reason for the supposed "Iranian nuclear threat". China has
also recently created the Shanghai Gold Exchange, as a means to further
commoditize fiat currency (china has very large gold reserves). BRICS has
created a competitor to the Western-dominated IMF in the past 24 months, which
also threatens the US reserve currency's backup plan, which is called the SDR
(Special Drawing Rights). The list goes on; not to mention the calls Xi
Jinping has directly made to remove the US dollar as a reserve currency (IOW,
this isn't exactly covert, as of about mid 2010).

As you can see, considering our posturing in the South China Sea, and
considering what happened to Gaddafi, the US won't acquiesce to losing its
reserve status. So, the US dollar is not going to "collapse", lest we find
ourselves engaged in total war (with China, et al). So, as long as you don't
plan to bail on the US in a total war scenario, you're, in my opinion, safe to
invest in USD.

~~~
hx87
Another reason, possible related to all of the above: if the USD sharply
declines in value for some reason, its trade deficits with many export-
dependent economies (e.g. China) will also decline and perhaps even become
surpluses. Those who run such economies /really/ don't want that to happen.

------
lifeisstillgood
So, the article says dotcoms caused first bubble in 2000, houses in 2008, but
this one is driven by central banks printing money. And there is no way they
will stop printing so this is an infinite bubble

There is sooo much wrong with that. As @rtpg says, that s stops not when Fed
stops printing money but when market realises that the high asset prices
"globally" become obviously unsustainable.

The issue is that when that happens, it happens across the world
simultaneously- which is why they article refers to the complacency index. (It
is possible the article is more sarcastic than I could read into it)

~~~
dragonwriter
> So, the article says dotcoms caused first bubble in 2000, houses in 2008,
> but this one is driven by central banks printing money. And there is no way
> they will stop printing so this is an infinite bubble

> There is sooo much wrong with that

Well, for one thing, its not true. In the US, for instance, the Fed stopped QE
in 2014, and has not only stopped QE but raised interest rate targets slightly
since.

Central bank policy -- like the economic indicators that drive it -- tends to
be cyclical, not infinite positive feedback. This has been a long and
particularly intense period of loose monetary policy (largely, because
governments, especially the USG, have completely been asleep at the switch in
terms of _fiscal_ policy response to the economic situation, relying more
heavily than is sane on central banks and monetary policy), but there is very
little to think that the usual cyclical drivers won't work the way they
normally do.

(Of course, that won't actually pop asset prices in general -- though it may
result in a shift across asset classes -- since the cyclical drivers of
tighter monetary policy are _exactly_ the same things that drive high general
asset prices _without_ a loose-money driver.)

> As @rtpg says, that s stops not when Fed stops printing money but when
> market realises that the high asset prices "globally" become obviously
> unsustainable.

Which, if those prices were high nominal prices driven by the Fed printing
money such that the supply of money vs. that of other assets was ever
expanding, would actually require the Fed to stop printing money, because as
long as it continued to do that (and as long as people believed it _would_
continue to do that), high asset prices would be sustainable.

(Conversely, if people believed that the Fed would stop, but would only do so
because of the existence of some other driver supporting asset value, then
even _with_ the money-printing-presses stopped asset values would be
maintainable.)

------
vadym909
This is scary as I moved to all cash a couple of years ago. I still don't
understand how there can be a bubble in money. All I see around me is house
and stock prices going up incredibly. Does a money bubble popping result in
high inflation making my money in the bank worthless. Fuck. First I got burned
in stocks, then in real estate, and now cash?

~~~
ianai
What could happen is your cash becoming more valuable in a deflationary
spiral. My take is you're incurring the opportunity cost today on your cash
reserves. Your present value is based on a belief that the future will be
deflationary over inflationary. You could model this with an estimation of the
present value of your cash holdings as a function of how long you hold it and
your expected inflation rates.

~~~
cloakandswagger
This is an extremely risky proposition, because under no circumstances will
the Fed ever permit long term deflation.

They will literally mail cash to individual households or have cash giveaways
before that happens. Or, more simply, they ask Congress to pass a law stating
that all cash reserves over a certain amount are heavily taxed or confiscated
entirely.

My suggestion:

10% notional gold

10% physical gold & silver

10% Bitcoin

40% equities

30% cash

~~~
ianai
True and printing money is too easy a thing to bet against. We are truly in
weird times.

------
notadoc
There has been substantial asset inflation, the cost of housing, health care,
education, child care are all through the roof, and really there is
substantial inflation in necessities too. Yet wages are largely stagnant, and
people can still buy cheap junk at Walmart, so officially inflation is called
low.

Like all bubbles, it will eventually correct. It could be soon, it could be
years away. We may be stuck in secular stagnation with high asset inflation
for a long time. Who really knows? That there has been so much intervention
from central banks, with ZIRP and NIRP policy being the new norm, should make
everyone a bit nervous. We are in uncharted waters.

------
jameslk
The focus on our current economic climate frequently seems to be on the
experimental dovish policies of central banks and its implications on bubbling
asset prices, yet nobody seems to be talking about how eerily close this is
predicted by the Austrian Business Cycle Theory[0]. I'm confounded by why the
theory is considered by mainstream economists as controversial when in
instances such as the dot com and housing bubbles popping in the US it was
preceeded by the Federal Reserve contracting the money supply after prolonged
periods of money printing. I fully expect the next fatal economic downturn to
follow the eventual raising of interest rates, if runaway inflation doesn't
occur first[1].

0\.
[https://en.wikipedia.org/wiki/Austrian_business_cycle_theory](https://en.wikipedia.org/wiki/Austrian_business_cycle_theory)

1\.
[http://www.economist.com/blogs/buttonwood/2010/05/inflation_...](http://www.economist.com/blogs/buttonwood/2010/05/inflation_and_sovereign_debt)

~~~
caublestone
Thank you for sharing this theory. I agree with the theory that low interest
rates are meant to incentivize riskier investments and can lead to runaway
prices in capital asset classes that eventually must correct because they
don't provide consumer value. However, based on this theory, the current
actions of corporations and investors are rejecting the incentive to place
riskier bets and I can't see run away prices on a capital asset on the macro
us or global scale as we saw with housing from 80s to 2008. Perhaps capital
allocation managers implicitly agree with the theory and taking cautionary
steps to avoid the bust.

But I wonder if this fear of busts is holding back innovation. Society is
helpless to progress at a faster rate because God forbid there is another bust
and people lose jobs and hope about the future. I think companies are waiting
with cash in hand to buy up the good deals in an expecting bust. But I would
prefer to have the cash used for risky ventures and I accept the bust outcome.

------
holdenc
I am reminded of when I worked on a financial analytics app and we constantly
had to remove the Zimbabwe stocks. They'd all gone up 1000's of percent and
ruined all the other data on the chart (appearance-wise). Why? As the Zimbabwe
currency lost value and became worthless, the stocks denominated in that
currency held their real value. I would expect to see some version of this
play out in the stock market today.

~~~
ihaveajob
I have near zero knowledge of finance infrastructure, but shouldn't stock
price be normalized by the exchange rate in which said stock is denominated?
Say index everything in USD or whatever currency your user prefers. Otherwise,
even if you remove Zimbabwe stocks from your charts, any analytics will be
fundamentally flawed.

~~~
holdenc
You are right that most carefully presented charts will correct for exchange
rate differences over time. However, a database of stocks will often keep
performance over different time periods in the native currency as a
convenience. For example, this is usually good enough for most screening
applications, and on-the-fly charting apps.

------
neolefty
Possible interpretation:

Not enough people are trying risky entrepreneurial things; the market is
begging us to quit our jobs and try more startups.

In other words, productivity gains are meaning that the world is saving too
much money, and we need fewer workers and more explorers.

Alternate: Wages should be raised across the board.

------
squozzer
The conclusion makes sense only if every major economy participates. What
about China and Russia? Granted, I doubt investors today trust either country
without qualification, but if this goes on another 5 or 10 years, who knows?

~~~
linkregister
Out of those two countries, Russia, a country with an economy smaller than
that of Spain, is the only one not currently engaged in massive subsidies and
stoking artificial demand (metallurgy, construction). China isn't engaging in
QE but it is using other methods to prop growth.

I doubt China's position is as tenuous as the Euro zone, but it is engaging in
some similar practices.

Russia is wholly dependent on the Euro zone as an export-based economy until
it can improve internal consumption. It can't be relied upon to prop up the
world economy in the event of an asset value correction.

------
gwbas1c
I keep seeing discussions about high-value neighborhoods full of empty homes.
The homes are purchased purely as a way to hold value.

Vancouver and London are examples that I've heard of.

Sounds like a big clue to me!

------
crimsonalucard
It's obvious bubbles are all caused by money anyway (printed or not). What is
the money being spent on?

------
jgalt212
Helicopter money has worked, unfortunately all the money has fallen onto 15
Central Park West.

------
cardmagic
The forrest is dry, just waiting for a black swan. The problem with black
swans is they are definitionally unknown unknowns... until they are not any
more.

------
randomgyatwork
Isn't it always a thing before a bubble pops where everyone says the bubble
wont pop.

~~~
dageshi
A lot of people called housing a bubble a long time before it popped.

~~~
drcode
Economist cover June 2005: [http://www.tradersnarrative.com/wp-
content/uploads/2008/03/a...](http://www.tradersnarrative.com/wp-
content/uploads/2008/03/after%20the%20fall%20house%20prices%20economist%20magazine%202005.png)

