Get Ready To Party Like It’s 2008

Apparently Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with stock crash if Congress doesn’t pass a tax reform Bill. His reason is that the stock market surge since the election was based on the hopes of a big tax cut. This reminds me of 2008, when then-Treasury Secretary, ex-Goldman Sachs CEO, Henry Paulson, and Fed Chairman, Ben Bernanke, paraded in front of Congress and threatened a complete systemic collapse if Congress didn’t authorize an $800 billion bailout of the biggest banks.

The U.S. financial system is experiencing an asset “bubble” that is unprecedented in history. This is a bubble that has been fueled by an unprecedented amount of Central Bank money printing and credit creation. As you are well aware, the Fed printed more than $4 trillion dollars of currency that was used to buy Treasury bonds and mortgage securities. But it has also enabled an unprecedented amount of credit creation. This credit availability has further fueled the rampant inflation in asset prices – specifically stocks, bonds and housing, the price of which now exceeds the levels seen in 2008 right before the great financial crisis.

However, you might not be aware that Central Banks outside of the U.S. continue printing money that is being used to buy stocks and risky bonds. The Bank of Japan now owns more than 75% of that nation’s stock ETFs. The Swiss National Bank holds over $80 billion worth of U.S. stocks, $17 billion of which were purchased in 2017. The European Central Bank, in addition to buying member country sovereign-issued debt is now buying corporate bonds, some of which are non-investment grade. In fact, more German’s are being encouraged to buy stocks (or Aktien kaufen) in order to get better financial security and reduce the percentage of stocks owned by the banks.

The table to the right shows the YTD performance of the US dollar vs. major currencies and the gold price vs major currencies. The dollar has appreciated in value YTD vs. alternative fiat currencies. More than anything, this represents the false sense of “hope” that was engendered by the election of Trump. As you can see from the right side of the table, gold is also up YTD vs every major currency. Note that gold has appreciated the most vs. the U.S. dollar. The performance of gold vs. fiat currencies reflects the fact that Central Banks globally are devaluing their currencies by printing currency and sovereign debt in increasing quantities. The rise vs. the dollar also reflects the expectation that the Fed and the Treasury might be printing even more currency and Treasury debt at some point in the next 6-12 months. This is despite the posturing by the Fed about “reducing” the size of its balance sheet, which is nothing more than scripted rhetoric.

“We have the worst revival of an economy since the Great Depression. And believe me: we’re in a bubble right now.” Donald Trump, from a Presidential campaign speech

Margin debt is at a record high. At $551 billion, it’s double the amount of margin debt outstanding at the peak of the tech bubble in 2000. It’s 45% greater than the amount of margin debt outstanding at the peak of the 2007 bubble.

Stock investors and house-flippers in the U.S. now make investment decisions based on the premise that, no matter what fundamental development or new event occurs, the market will always go up. “It’s different this time” has crept back into the rationale. The markets are particularly dangerous now. The concept of “risk” has been completely removed from investment equation.

This dynamic is the direct result of the money printing and credit creation which has enabled the Fed to keep interest rates near zero. The law economics tells us that increasing the supply of “good” without a corresponding increase in demand for that good results in a falling price. This is why interest rates are near zero. The Fed and the Government have increased the supply of currency via printing and issuing credit. Investors , in turn, are taking that near-zero cost of currency and credit and throwing it recklessly in all assets, but specifically stocks and homes.

Currently, anyone who puts their money into the stock, bond and housing markets in search of making money is doing nothing other than gambling recklessly on the certainty of the outcome of two highly inter-related events: 1) the willingness of Central Banks to continue pushing the price of assets higher with printed money; 2) the continued participation of investors who are willing to pay more than the previous investor to make the same bet. Most asset-price chasing buyers have no idea that they are doing nothing more than sitting at a giant casino table game.

The current bubble has been created by a record level of money printing and debt creation globally. Unfortunately, the upward velocity of rising asset prices has seduced investors to recklessly abandon all notion of risk. Based on several studies on investor cash holdings as a percentage of their overall portfolio (cash on the sidelines), investors are “all-in.” One would have to be brain-dead to not acknowledge that global Central Bank money-printing has caused the current “everything” asset bubble. But it’s a “fear of missing out” that has driven investors to pile blindly into stocks with zero regard for fundamental value. Even pensions funds, according to someone I know who works at a pension fund, have pushed equity allocations to the limit.

For the most part, Central Banks are now posturing as if they are going to stop printing money and, in some cases, “shrink” the size of their balance sheet (i.e. reverse “quantitative easing”). To the extent that the first chart above (SPX futures) reflects a combination of Central Bank money printing and investors going “all-in” on stocks (record low cash levels), IF the Central Banks simply stop printing money and do not shrink their balance sheets, who will be left to buy stocks when the selling begins? If they do shrink their balance sheets, the central banks will start the selling as they have to sell their holdings in order to shrink their balance sheets.

13 thoughts on “Get Ready To Party Like It’s 2008

  1. They will only unwind to deliberately crash the markets, as there is no way to reduce their balance sheets without dire consequence. In short, they’re checkmated. Of course, this is the inevitability of privatizing the monopoly control and issuance of currency and credit. Counterfeiting has always been the most alluring crime. They can’t help themselves – greed is a powerful addiction.

  2. I sent this article to a friend who has been a B.T.F.D. player
    for the last six years. He has repeated to me many times that
    I was doom and gloom and did not know what I was talking about.
    He gave me the symbolic eye roll while speaking to him on the phone.
    The rational he uses is that the Fed will not allow the pension funds
    who are very long stocks go under. Therefore stock will go up for years
    to come eventually hitting 100,000 on the Dow. This guy is the
    prototypical market participant. I had family members tell me I’m
    an idiot for cashing out my index funds last December and buying
    gold @ 1180-1200. The article you penned is very logical and makes
    a very strong argument for what could happen very soon. I guess we
    are witnessing classic market psychology, fear and greed.

  3. > Apparently Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with stock crash if Congress didn’t pass a tax reform Bill. His reason is that the stock market surge since the election was based on the hopes of a big tax cut.


    > Moody’s published a note today threatening to finally strip the U.S. of its AAA credit rating if the tax plan is ultimately passed as currently contemplated.

    So … a win win for gold.

  4. Maybe it is different this time, Dave. Maybe this is a “too big to fail bubble” which, if pricked, will rapidly lead to a Mad Max world, so the powers-that-be keep pumping and levitating in order to avoid, ahem, that unpleasant scenario. Dow 100,000? Why not?

    A rising stock market is not necessarily an indication that all is well, by the way (the Venezuelan stock market has in the last year gone parabolic in such a way as to make the bitcoin bubble look feeble and pathetic by comparison).

    If there were a wheelbarrow futures contract, I would be buying calls (by the wheelbarrow full). Rudolf Havenstein would be proud.

      1. I should have added that I was being facetious/sarcastic, Dave. My bad. Of course it’s not different this time, except that when this sucker collapses, it won’t be reflated.

        1. Marcus,

          You are right that a pop of this bubble trends us towards a Mad Max world. The resulting recession is beyond what people [exception of those who went through the great depression in the U.S….not many left alive…or what is going on in Venezuela now] can imagine. And if it is delayed by QE etc. until energy fundamentals [not much cheap oil left] erode further it will be that much worse.

  5. Lynette Zang whom I put in my top 5 pundits alone with our humble scribe here is now drawing the parallel with Vennie and Zimmy and their stock markets being top performers and their movements into Hyper Inflation. I can go with that analogy for the good old USA. That is now one of my favorite points to bring up with my go go go stock market friends. Followed by it doesn’t matter how high your stock market goes if your currency is ass wipe….well I have to tone it down for some of them. Money has to be a store of wealth with intrinsic value or its value will reach zero to paraphrase Voltaire.

  6. Calling the market “gambling” is the literal truth, not simply a metaphore. The fact that nobody redeams their shares directly from issuers for their actual share of production (let alone actually holding the stock certificate) ALONE proves this, yet we live in a nation of truly braindead fools who believe otherwise. The good news is that some are waking up; just very few and far between.

    As for mad-max…you haven’t seen the post apocalypse until there’s a false flag, and the nukes are launched. And in order for that to happen, the madness must reach a fever pitch. Ever the more reason for the wise to speak out.

    1. Good points. I can remember the 80’s in Chicago and advent of all the discount brokers that appeared in the downtown financial district. I walked by several on my way to work in the Merchandise Mart and later the Quaker Tower. I still have some of the receipts for $20 trades and you had to take a stock cert with the transaction. Last year I converted a large holding into a stock cert (pain in the ass) and it cost $500 to get the job done. If that isn’t a flashing red light on who really owns the stocks now what is. Again heard the current explanation on who really holds the stocks and its clustermuck of ownership. The crooks in the financial asylum are as thorough as they can be. We done been sold down da river.

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