Credit Bubble Will End in More Than Tears

Recently we heard – again – the most overused phrase of the credit bubble so far. “Something is going to end in tears,” said HSBC (NYSE:HBC) Chairman Stephen Green. He was referring to the aforementioned credit bubble. He’s right of course. But we need a new phrase for this, dear reader. “It will all end in tears,” doesn’t really communicate the gravity and savageness of the potential destruction that could result from a liquidity contraction.

Sappy movies like “The Notebook,” end in tears. Weddings end in tears. But credit bubbles, they end in bankruptcy, humiliation, shame, helplessness, insolvency, and massive social unrest followed by political upheaval. This credit bubble might not just end in tears. It could end in gunshots, broken windows, minor revolutions and major political realignments.

The only question now is when will it end. This summer? We’re sticking by our forecast that the world wide melt up has yet to reach truly absurd levels. Granted, things have been pretty absurd. But the US Federal Reserve has not yet begun cutting interest rates again. When the Fed does that, or something else more drastic, the end will have begun.

To borrow a musical terms we Googled this morning, this movement of the financial opera is something of a scherzo, which, in the best irony of the week, is Italian for “joke”. We came across scherzo because the slightly manic tempo of the times reminded us of the big buildup in the second movement of Beethoven’s ninth symphony. And we also remember hearing that movement during a scene in A Clockwork Orange.

The scene that came to mind is the one where Alex is imprisoned in the upstairs bedroom of Mr Alexander, man whose wife Alex had raped earlier in the movie. Mr Alexander devises a plot to play an electronic version of the second (scherzo) movement of the ninth symphony at top volume in Alex’s bedroom prison. Alex has previously been conditioned – in Skinnerian fashion, the way investors are conditioned to buy the dips – to become violently ill when hearing Beethoven.

It works, sort of. Driven mad by the climbing music, Alex jumps out the window to the ground below. But he doesn’t die. He wakes up in a hospital with his love for violence completely restored by the blunt trauma to his head.

Which brings us back to Wall Street and cycles. Speculators go mad at the end of a cycle. And at the end of a cycle, everyone is a speculator. We’re not quite there…yet.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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