Mike ("Mish") Shedlock, who was recently fined by a French bank (Société Générale, 8000 euros) for quoting a French blogger who criticized that bank, has written an excellent post on current bubbles in <various markets all over the world, too numerous to list here>.
Although we are in Year 18 of what I call the Bubble Era, things seem to have taken a turn for the worse lately, a development which remained only a (remote?, likely?) possibility only a few years ago.
The most conspicuous of these bubbles is in the U.S. stock market, whose valuation (as measured by various indices) now threatens to touch Heaven itself. We acknowledge of course that the U.S. stock market is not in a bubble "officially" unless former Fed fixture "Easy Al" Greenspan says it is not in a bubble. Happily, we've got the reverse confirmation we need.
The S&P 500 on November 25, 2013 in the 18th year of the Bubble Era
Mish quotes market analyst John Hussman at some length. I can not recommend Hussman highly enough, for he is one of the few financial analysts who has an abiding interest in what I affectionately call Reality. Mish did not mention two recent Hussman newsletters which I also highly recommend.
- Did Monetary Policy Cause The Recovery? (October 21, 2013)
- When Economic Data Is Worse Than Useless (October 7, 2013)
The worst news by far in Mish's post was that Hugh Hendry has capitulated. If you don't know who he is, Hendry is one of the few investors on Earth (like Hussman) who always maintains a firm grip on Reality, which makes what he has to say all the more disturbing.
Speaking at Harrington Cooper's 2013 conference this morning, Hendry (pictured left) said he is no longer fighting the "two-way feedback loop" which is continuing to boost risk assets.
That centres on the currency war being played out between the US and China, in which US QE prompts dollar-denominated investment to head to China, and China fights the resulting upwards pressure on its currency by manufacturing an investment boom.
Hendry said this creates a "global supply glut", leading to falling US inflation expectations (as this supply far outweights US domestic demand) - which in turn prompts the Federal Reserve to loosen policy once again.
"I can no longer say I am bearish. When markets become parabolic the people who exist within them are trend followers, because the guys who are qualitative have got taken out," Hendry said.
"I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years' time."
"I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."
Hendry uses the word parabolic, but on the upward sloping part of the curve, where we are now, as the valuation of the U.S. stock market soars Heaven-wards, the trend looks hyperbolic.
Despite Hendry's futile attempts to make the current market environment "make sense," it appears now that the thing that has truly gone hyperbolic is human craziness, market valuations being merely a symptom of this more fundamental phenomenon.
[ pictured left, a hyperbolic razor blades curve, from The Economist, which itself is another manifestation of human craziness ]
On the other hand, if you can't beat 'em, join 'em is almost always excellent advice for all humans everywhere regardless of specific circumstances.
In so far as the financial markets have now become a parody of themselves, it is no longer necessary to speak of "bubbles" and "crashes" and the eventual economic consequences thereof. You can also ignore all those telling you to buy and the few remaining advisers telling you to sell.
It seems that we have far more serious problems to deal with, what with humans finally losing their grip altogether a mere two and a half centuries after the Industrial Revolution got properly underway. Some of us thought it was only a matter of time before this unfortunate development became manifest—humans were only hanging on by their fingernails anyway. It appears that time has finally come.
We can only hope that the market trends which Hugh Hendry ignores at his peril will squash any lingering rumors regarding humans as rational actors who always follow their own best interests, where the sum of these behaviors creates this best of all possible worlds through the astonishing magic of the "invisible hand" (along with the machinations of the central banks of China and the United States).
So we see here in 2013 that a new (but not unexpected) development has taken place, which puts our medium-term future in a wholly new light. Don't panic, however. As Hendry says, it could be years before we see the disastrous (but predictable and entertaining) consequences of humanity's present financial course.
Mindful that the holidays are almost upon us, we can only agree with Tiny Tim, who said, "God bless us, everyone!"
And remember, the only thing you have to fear is fear itself.
Dave-- I just discovered this blog last night after googling something like "no hope in humanity" (haha) and am thrilled you're still posting and have new posts open to comments! :)
I would love to go on and on about this blog as a whole (I read it for hours last night), but I'll restrain myself in order to stay on this post's topic.
Given other posts and your general views on humanity, I find it kind of funny that you say "what with humans finally losing their grip altogether." I got the sense from your other posts that you're of the opinion that humanity never had much of a grip to begin with (i.e. that that's characteristic of human nature).
Are you saying that human nature is particularly bad right now because it's leading it to its own demise, which is hasn't before? This is really just a quibble, but it seems like humanity hastening its own end has only revealed a limitation of human nature that we perhaps did not have much opportunity to notice before (a latent characteristic, as you might say) rather than indicating a recent change in human nature for the worse.
Thanks so much for keeping this blog up! For what it's worth, this one person found it enormously thought-provoking and influential. :)
Posted by: Jack Lindstrom | 11/25/2013 at 02:09 PM