The Everything Bubble
Key Takeaways
- Without underlying growth, without real profits and productivity gains, sooner or later, what goes up must come down.
- If the asset begins to sell for a lot more than its economic value, and the price rises to two or more times the economic value, driven primarily by rising perceived or psychological value, then we say there is a bubble.
- When the price rise becomes increasingly speculative and is based almost entirely on investment psychology.
- When you need to keep hyping to inflate the asset, it is a bubble.
Hindsight is, of course, 20/20. But back in those glory days of the roaring 1990s, it looked like the sky was the limit. The limit turned out to be a lot closer to the ground. Despite all the hype and wishful thinking, the overinflated Internet bubble-like every bubble before and since was subject to the same laws of gravity that apply to the rest of the economy. Without underlying growth, without real profits and productivity gains, sooner or later, what goes up must come down.
While fortunes were lost and dozens of high-tech companies went belly up, the popping of the relatively small Internet bubble was merely a sneak preview of the financial earthquake that is yet to come. Rumbling ominously beneath our seemingly prosperous economy is not one, but several linked financial bubbles that are threatening to interact call Matt to collide and ultimately pop. Together, the bursting of America’s bubble economy will create a temporary bubble quake of shock waves here. Around the world, depressing stocks and real estate values drive up interest and inflation and throw the USA and other economies into a temporary global recession.
Challenges of the current economy
- Huge international trade deficits that keep getting bigger
- Astronomical federal government deficits heavily financed by foreign capital
- Ever-expanding consumer debt with no equal rise in consumer income
- The lowest savings rates in our nation’s history
- A national housing market that has climbed 30% year-to-date, while incomes barely rose, paired with increased unemployment
Clearly, the situation is far from ideal. We don’t expect everyone to agree with our entire analysis of how we got here and what’s ahead. Still, we hope to give something valuable to anyone who believes that the current conditions are not sustainable. We hope to give you a logical basis for rational actions that can help you prevent significant asset loss and perhaps even create tremendous wealth when the current conditions can no longer be sustained.
Whether or not you buy all the ideas in this article. It will give you a new way to think where they might be headed about how this condition may directly impact you and what specific steps you can take to protect your assets and even cash in on them. Would you please start to blow this golden opportunity by quibbling over the debatable details? You need not believe all we say to position yourself right now to make huge profits very shortly.
What is a Bubble?
There is no formal definition within economics that provides a precise way of identifying a bubble. For our purposes, we say a bubble exists whenever an asset’s perceived or psychological value exceeds its real economic value. By economic value, we mean a value based on logical economic parameters, such as population growth, rising company earnings, increased personal income, or some other fundamental economic parameters that are directly tied to the assets’ rise in value. On the other hand, if the asset begins to sell for a lot more than its economic value, and the price rises to two or more times the economic value, driven primarily by rising perceived or psychological value, then we say there is a bubble.
It’s important to understand that every bubble goes up for very logical, economically sound reasons in the early stages. For example, housing prices may increase because as the population grows, more people want houses than houses available in each area. Housing prices may also increase because as incomes rise, more people want to buy more expensive homes in limited supply. The rising value of real estate is simply a matter of supply and demand. Limited supply and growing demand drive up the price. No matter how expensive homes become, if there are underline economic reasons for the price increase, there is no real estate bubble.
This is similar to the GameStop movement. It was initially a value play; however, it has become a bubble when people are betting on their life savings, and they have overly excessive emotions to stick it to the man and the hedge funds. But sometimes, as prices rise for any assets, something else kicks in. Call it wishful thinking or just plain greed. People don’t want to miss out on the benefits of owning something increasing in value, so more and more people want to buy it. As demand goes up, so does price, but in this case, the underlying logical economic parameters are not there to support the price rise. After a while, the item in question may be selling far above its logical economic price, based on logical economic parameters. Instead, the price rise becomes increasingly speculative and is based almost entirely on investment psychology.
While it’s true that perceived value is the only value that matters when buying or selling in the marketplace, it is also true that sooner or later, you cannot fool all the people all the time periods eventually the bubble burst and perceived values fall to their true economic values. Real rock-solid economic value rests firmly on real economic parameters such as real profits, real productivity growth, real wage increases, and real assets gain. Pumped-up over-inflated bubbles do not.
History is littered with countless examples of this, including the recent rise and fall of the Internet bubble.
Rather than trying to refute every esoteric economic argument or debate every financial cheerleader, we are going to layout for you some fundamental, very telling facts and let reasonable people come to their own common-sense conclusion about real or inflated values one bubble at a time.
Our asset bubbles will fall in two stages the first stage is due to bubbles bursting, the second stage is due to the bad economy is important to point out that all acid bubbles such as the stock market bubble and the dollar bubble will burst in two stages. The first stage will be bursting off the recent overvalued price bubble. The second stage will be the additional fall in value due to the significant coming downturn in the economy.
For example, if the value of a house has risen from $200,000 to $300,000 in the last five years, the first stage of the bubble fall may be a decline of the recent bubble price back to 200,000. Unfortunately, it doesn’t end there. The second stage of the fall will involve a further value decline, below $200,000 when adjusted for inflation, due to very high interest rates and the languid economy. With many US assets and assets bubbles, the second stage decline could be quite significant as well.
Do we have a bubble in the stock market?
You can spend days studying the charts and numbers up to one side and down to the other. Still, all you really need to know is this the value of U.S. stocks (blue-chip stocks, not hyped high tech) grew nearly tenfold in the two decades from 1982 to 2000, while real earnings adjusted for inflation increased only three-fold over the same time.
By contrast, in the previous 59 years, from 1928 to 1982, the stock market, as measured by the Dow Jones industrial average, grew a much more reasonable threefold during a time of future economic growth. If the real underlying economic value of stocks had increased tenfold in 20 years, we would also have seen a similar rise in real earnings and, to some extent, gross domestic product. That didn’t happen. Instead, investors have spent two decades making stock values defy gravity in a flurry of excitement that bestselling author Robert Shiller beautifully described in his book irrational exuberance. As we said before, perceived value is all it takes to set the price in any marketplace. But not forever. At some point, economic gravity kicks in, investors pull out, and the bubble pops.
If a tenfold increase in 20 years is not enough evidence for you, another way to decide for yourself if there is or not a bubble in the stock market is to look at an old standby for Assassin’s stock value the price to earnings ratio. Under normal conditions, the value of a company’s stock is directly related to that company’s profit or earnings period. When earnings grow up, stock values go up. When earnings go down, stock values go down. But what if stock prices start going up faster than earnings? What if stocks keep going up and up to no matter what the companies’ profit? One that, by definition, be a bubble?
As of mid-2006, PE ratios are about 25, rather than the average of 14 to 15, clearly indicating that most stocks are currently overvalued. High PE ratios are fine if everyone keeps playing the gay man keeps on buying overvalued stocks. But if anything should happen to spook skittish investors into dumping their overpriced stocks, economic gravity will kick in, a sell-off will ensue, and stock values will drop. What could spook investors? To answer that, we need to see if any other bubbles are floating around today’s economy.
Do we have a bubble in the value of the dollar?
Ask with assessing the stock markets. There are dozens of ways to measure the merits of the dollars. In the last couple of years, the Japanese central bank has bought almost a trillion dollars of US currency. The Chinese central bank is not far behind, buying a whopping $800 billion of US cash.
Why would a foreign government buy so much of our money? They do it for one simple reason to keep the value of our dollars so high, so we can continue buying lots of their exports.
Here’s an even better question where would we be right now if China and Japan had not bought up almost $2 trillion of our cash? What would the dollar’s value be if they hadn’t stepped in and propped it up? And more importantly, what will happen to our dollar when they stop propping it up?
Exactly when China and Japan quit buying massive amounts of our dollars is hard to say, but there’s much you can count on anytime a nation’s currency has to be bought up in huge numbers to maintain its value. That is prima fascia evidence of a bubble. Don’t be snowed by complicated arguments. You can hold your own in any debate about the true value of any asset armed with this one deadly fact: if you must manipulate it to keep it afloat, it’s a bubble. It’s that simple.
The more complex question is when will this manipulation stop in the bubble burst. For now, all you need to know is that a solid economically grounded dollar does not need foreign governments to buy massive amounts of it to prop up its value if it’s in manipulated if it’s made to levitate despite economic gravity if it floats like a bubble and it looks like a bubble… it’s a bubble.
What’s unusual about America’s bubble economy?
It’s the first foreign government-supported bubble throughout history. Most financial bubbles have resulted from the action of private investors. Private investors buy the bubbles goes up, and then they sell the bubble goes down
In this case, we have multiple bubbles, one that is government built and another that is government-supported. Our big government deficit bubble was created over many years when our government kept borrowing more and more money from foreign investors. But few people realize our overvalued dollar bubble is also being supported by the government, not our government, but the governments of China-Japan and other foreign countries that are actively buying dollars to the proper price.
This is a truly unusual situation. It’s like having another nation, let’s say Japan, actively buying up our Internet stuff to keep prices high period. Of course, they’re not finding our dollars to play a speculated game but to maintain their exports and dropped so that they can make in political support back home. But the fact that major national governments are now directly involved in maintaining the value of our currency makes our overvalued dollar bubble much larger than otherwise would be.
And the bigger the bubble, the harder it falls.
