Bubble, Bubble, Toil and Trouble!

"Double, double toil and trouble; 

Fire burn and caldron bubble. 

Fillet of a fenny snake, 

In the caldron boil and bake; 

Eye of newt and toe of frog, 

Wool of bat and tongue of dog, 

Adder's fork and blind-worm's sting, 

Lizard's leg and howlet's wing, 

For a charm of powerful trouble, 

Like a hell-broth boil and bubble." - William Shakespeare

I mentioned it in the last letter but it is worth mentioning again, by any metric that you can find we are in a bubble (apologies to Shakespeare as he says Double not Bubble but close enough for this blog).  Simple economic mathematics shows that the result of printing money and holding interest rates at below market values is the over-inflation of asset values.  It was just a matter of time before it happened but even the Federal Reserve has now mentioned that asset values “may” be a little high.  By the time they are saying this you can bet that we are in the final throws of the bull market.  That said they still have not learned their lessons and continue to believe that their money printing techniques (that have never worked) can magically manipulate market prices removing the chance of even the slightest drop in economic expansion.  Bernanke stated when he was the Federal Reserve Chairman that “we’ve never had a decline in house prices on a nationwide basis”, right before the property bubble burst.  Now we have Yellen saying that we’ll never have another financial crisis!  Wow the egotism and the ignorance is unbelievable and this is from the most powerful market manipulator in the world.

I have also mentioned repeatedly that economic growth can only resume at a healthy clip when you remove the shackles of debt.  While the Federal Reserve has stopped printing money the rest of the world’s central bankers took up the mantle and have bludgeoned forward mindlessly printing.  This has resulted in the massive run up in stock prices.  These stock prices require this fuel to keep them airborne so when you have Yellen and others start to talk of cutting back on their stimulus there is going to be a fall out, it is just a matter of time.  As with all fall outs the most egregious benefactors will be the hardest hit.  Think of say Tesla with a $60 billion market capitalization and losing $400 million a quarter, or Snap Chat (never made money), or Twitter (same) or a myriad of other stocks and you get the picture.

So, taking Yellen’s comments at face value (I assume that she was not joking although I secretly hope that she was) what will the Federal Reserve do when the market takes a nose dive?  Well for one they can drop rates from the lofty 1% mark that they raised (now that should be really helpful, NOT), or they can print more money and add to the $15 trillion of debt onto the global central bankers’ balance sheets (this has never worked and never will but I am sure that they will try once again), or congress could reduce taxes and increase spending right when they are talking about balancing the budget deficit.  This time around the tools at their disposal are significantly curtailed and while they will no doubt try all of the above the results will be even more feeble than those we have witnessed to date.  Not only has this been the weakest recovery in the history of the world but with the massive buildup of debt the next recovery will be even worse.

I am sure that this will not stop our egotistical maniacal leaders from proving once and for all that their strategies work.  This will mean tens of Trillions (billions will be SO 2010 darling) added to the Federal Reserve’s balance sheet plus negative interest rates (you will now have to pay the bank to place your savings there).  Once again this will kick the can down the road however the recovery will be even more anemic as massive increases in debt DO NOT STIMULATE AN ECONOMY.  Growth stimulates an economy and growth comes from innovation and entrepreneurialism not debt.  Debt becomes a yolk that must be dragged around slowing down the cogs of capitalism grinding the economy down to its knees.  This is why the economic expansion has been weak and why, given the policies of the central bankers around the world, we will suffer for decades to come.