“But the glory has been the glory of pasteboard, and the wealth has been the wealth of tinsel.” – Anthony Trollope
The world seems to be taking a form of financial steroids…and maybe taking too much of it.
Yes, dear reader, love for old-fashioned values seems to have given way to price boffing…and the romance of real business ventures has been supplanted by the wham-bam-thank-you-ma’am of money-shuffling hustlers…
…Oh, dear, dear old reader…sigh…
But we pause this morning…to bring new dear readers into the conversation.
Markets and Money began in the summer of 1999. We were convinced then that the tech bubble – centred in the US NASDAQ market – was about to blow up.
Naturally, many readers were annoyed with us. They insisted that breakthroughs in communications technology were making us all smarter – for now we all had access to the worldwide web, and with it came an almost unlimited supply of INFORMATION.
Here at Markets and Money we argued that more information was not necessarily a good thing. Like manure, information can be helpful. But pile too much of it up in one place, and it begins to stink.
“You just don’t get it,” they replied. To which we let the market respond. Six months later those who “got it” got it good and hard. The tech bubble collapsed, taking many earnest investors with it.
“You don’t get what you expect from the investment markets,” we remarked, with a superior air. “You get what you deserve.”
The stock market was then going down…and the economy was going down too. But it was not much later that a tiny group of fanatics scored what must be history’s most successful surprise attack: they brought down two of Manhattan’s greatest buildings and twisted America’s entire foreign policy – which had there-to-fore been clumsy, but not absurd – towards a preposterous ‘War Against Terrorism.’
Under pressure from the delusionary threat of terrorists under every Arab head wrap, and a recession that looked as though it could go the way of Japan’s then 12-year slump, the Feds responded with the biggest stimulus of cash and credit in history. Tax rates were cut. Spending was increased. The Fed’s key lending rate went down to less than half the rate of inflation and stayed there for two years.
Now, it is time for others to have the last laugh. We didn’t think it would work. Americans were already too far in debt, we said. You can’t solve that problem by lending them more money at better rates.
Professors of moral philosophy surely approved of our logic. We hope they didn’t bet money on it. Lower lending rates set off a new bubble – this one in residential real estate. Suddenly, houses were rising in price at the fastest rate ever. Homeowners were feeling rich and sassy. They wanted to borrow…and now they had something to borrow against. So, it was off to the races, with the biggest run-up in the housing market in 100 years (and the biggest increase in consumer debt ever).
Meanwhile, the Bush Administration drew Tony Blair into its confidence and the two decided to attack Iraq. French president Jacques Chirac tried to warn them off their project; it was too risky, he said. We agreed with Chirac…and wrote a book, with Addison Wiggin, to describe what we saw as America’s imperial over-reaching, entitled “Empire of Debt.” In Paris at the time, US readers responded by saying they hoped American bombers dropped a bomb or two on us, and Chirac too, on their way to blow up targets in Iraq.
The US housing bubble began to lose air in 2006. Mortgage companies had lent billions to homebuyers who couldn’t pay them back. Suddenly, the lenders were in trouble…and the US housing market was, too.
Again, our logic was unassailable: The US economy…and by extension the world economy…depends on American consumer spending. Americans depend on rising house prices to give them the money to spend (there has been no real increase in average wages in the United States in 30 years). Therefore, stagnation or, god forbid, a slump in housing would cause a recession.
Not so far. But a housing market correction takes time. Sellers are reluctant to cut prices; while buyers take each small cut as an opportunity. They are all convinced that the correction will be slight, and quickly put behind us. But in the first quarter of this year, US GDP growth slid to just 0.6%, annualised. That is well below the rate of population growth in the United States, meaning that if the country continues to prosper at that rate, Americans will eventually be as rich as Bengalis or Zimbabweans.
But today comes news that the National Association of Realtors has pushed their recovery forecasts back a bit, on unemployment rates, inflationary fears, and rising mortgage rates. Looks like their certainty in a ‘soft landing’ for housing is being shaken.
It is a cold and windy day here in London. But all over the world, the financial markets are hot and bubbly. No one seems to care about the weakness of the US consumer. Asset prices are soaring almost everywhere; buyouts at record prices are in the news. Private equity firms are on the prowl and public companies on the run, spinning-off their assets as fast as they can to avoid being gobbled up. Fund managers are getting record bonuses. Living ‘artists’ are getting paydays that Monet and Rembrandt couldn’t have imagined. (More below…)
The rich are getting richer. And the poor? As Warren Buffett said when we interviewed him for the documentary, “A rising tide is lifting all boats…but it’s lifting yachts faster.”
It’s a worldwide Super Bubble – enjoy it while it lasts. Restaurants and bars in central London are full to overflowing – and now the city is the capital of the biggest, most successful industry of our time – modern finance.
People all over the world have come to believe something extraordinary…something that can’t be true; that they can all get rich without actually working or saving. Instead they buy and sell financial assets.
Whom do they buy them from and sell them to, you ask? Why each other, of course! Then won’t they end up, on average, no richer than they began – or will they end up actually poorer, when you take out all the fees paid to financial middlemen?
Yes, of course. But the longer this amazing Super Bubble goes on, the more people come to think it is normal…the more investment positions depend on it…and the more people suffer when it ends.
Next week…we explain the current worldwide Super Bubble in greater detail.
Markets and Money
Is the Super Bubble about to burst? Leave a comment below.