The Stock Market Bubble
Stock Market Bubble
Can you spell.... “Bubble”?
One can understand 'way back' in 1996 supposedly intelligent people debating whether or not the stock markets were over-valued and heading for a 'correction'. After all, other than the emerging market bubbles and the Mexican Speculation, there hadn't been a labeled “Bubble” since the Roaring 20's.
But after the post Y2K Dot-Com Bubble meltdown and the 2007-2008 Housing Bubble meltdown, its surreal to hear people maintaining in essence that there is such a thing as unending bull market. The Fed is inching closer to an inverted yield curve which by now everyone recognizes as the punch bowl being pulled away slowly. It means the Fed definitely sees the stock run-up as an asset bubble.
M.r Powell, the putative replacement for the Fed Chair, is widely seen as going to continue down the same path as Ms. Yellen. The only real question is how long will the banks resist the tightening, because it is they that are fueling this bubble with the 'free money' the Fed created to rescue the banking system from collapse. But instead of jump-starting the housing market as was touted, the banks routed the money into an asset run-up...again.
The longer it takes to force the economy into a recession the harsher will be the correction. That's why the housing market implosion was so severe: The Fed first inverted the yield in 2005, but it took till late in 2007 before the bubble lost its frothiness and collapsed.
Everyone seems to forget that the Fed is not chartered to protect and manage the economy, but rather the Banking system. And when the politicians give in to special interests and deregulate an industry, like they did with the banking sector when Glass-Steagall was repealed and later when Dodd-Frank was emasculated, they create a nightmare. And the investors who ran up this deliberate bubble will likely once again be bailed out and the general population left to pay the bill with all the effects of a deep recession. Once again.
You may well ask: “So what if it blows up again? I have nothing in the markets.”
For most of us that's true, technically. But the effects of a Bubble bursting are like a tsunami on the general economy. Just think back to the recessions of 2001 and 2008. (These dates are set by professional economists and don't reflect how it feels on the ground.) Those were NOT fun times. The Dot com blow-up decimated the Gen-Xers, and the Boomers nearing retirement. The Housing Blow-up flattened the Banking system, which meant credit was gone, leading to the unemployment crisis, and not just among the mortgage writers, bankers, and lawyers; but factories, small businesses, contractors, builders...few escaped.
And each and every recession drops the U.S. Economy to a lower plateau. It never recovers. The “recovery” after the '96 recession was dubbed the “Jobless recovery”. After the Dot-Com bust it was called the “Job-LOSS recovery. After 2008 they didn't even try and give it a cute name. And each time more of the wealth is transferred into fewer and fewer hands.
There is nothing we can do to prevent it from happening, but you can protect yourself to a limited extent. If you are in the markets; take your profits and get out. Or follow Warren Buffet's moves. As a small business person, be aware that credit may once again be trouble and consumers’ pockets will be emptied again. Try to reduce your personal debt NOW.
Long term what is needed is a rein on cowboy-capitalism: Re-regulation.
Yes. Re-regulation. Glass-Steagall needs to re-instated in all its former strength and updated to cover the new financial schemes. The world cannot be made save for only Speculators. The people and their economy need protection from the speculators.
Even in ancient Greece, speculation was recognized as destructively disruptive to the real economy. Plato suggested two solutions. Either make speculation illegal…or remove the protection by the courts of contract enforcement. It seems that the more things change the more they stay the same.
Update: December 2018
Unfortunately, none of this year's trends has negated my central point, that the markets are an inflated asset bubble.
By June global fund managers were bailing out of the markets. That is another signpost. To make up for those outflows, the markets have redoubled their efforts to get more small investors in.
By the beginning of December the first step into an Inverted Yield Curve began. All of a sudden everyone now knows all about the "Yield Curve", but the explanations of why it is inverting are specious.
More and more in the news, Talking Heads began pushing the messages that a.) Investors have to be in for the long term, b.) That the stock market is the best way to ensure sufficient retirement funds, and c.), began the hammering refrain about how good the 'fundamentals' are.
These were and are predictable because the exact same strategies were used in every pre-bust in the last 40 years.
This is not rocket science folks, though the 'experts' will try to dazzle you with B.S. It is observing and remembering. If you see red skies at night and the next day it is lovely, sooner or later you will predict when you see red skies in the evening it will be fine the next day.
The trick is to think for yourself, not absorb some one else's explanations.
Remember what Mark Twain said:
"If you don't read the news you are un-informed. If you read the news you are mis-informed."