Party Like It’s 2015
In 1982 the artist formally known as Prince released a popular party anthem called “1999”. The song was a premonition that 1999 would be a year we would all aspire to “party like”. It was obvious that Prince was making reference to the excitement associated with ringing in a new century. However, unbeknownst to him, the accommodative policies of the Federal Reserve would lead to a festal bubble in NASDAQ stocks, making his call to party in 1999 that much more appropriate.
After that hangover lapsed, our central bank—in full cooperation with the Wall Street casino--was once again donning party hats by the mid-2000’s. The Fed’s cheap money, along with the private banks’ proclivity to create credit, produced similar merriment in the housing market. The fallout after this party ended was much more severe than the previous monetary orgy.
Today, even as most Americans are still suffering the ill effects brought forth by all the aforementioned partying, the festivities on Wall Street’s trading floors have reached its apogee. Although GDP growth has remained below trend for years and household incomes have stagnated, the corrupt carnival barkers that dominate the financial services industry have caused investors to party like its 1999 and 2007…combined.
Last year venture capital investments reached a level that was last seen during the dotcom bubble, as they poured a staggering $48.3 billion into startup companies. One of those companies, Pinterest Inc., recently announced they were looking to raise $500 million in a new round of funding, which will double the company’s valuation to a hefty $11 billion. That’s a frothy valuation for an on-line scrapbook. But there is no room for the process of honest price discovery in an environment where money is free and failure has been annulled. And, if you are ever invited to one of these gluttonous venture capitalist galas, and are looking for a ride, check out Uber Technologies, an internet car service company valued at a whopping $41 billion dollars.
Today’s festivities span well beyond the 1999 internet startup theme. Those who missed their invite to the NASDAQ bubble and the real estate flipping bash, will be happy to learn subprime lending is back to its profligate peaks. Loans to consumers with low credit scores have reached the highest level since the start of the financial crisis. In fact, almost four out of every ten loans for autos, credit cards and personal borrowings in the U.S. went to subprime customers during the first 11 months of 2014. That amounted to more than 50 million consumer loans and credit cards totaling more than $189 billion, the highest levels since 2007.
But as Wall Street resumes its gaiety, Main Street is still mired in despair. According to a newly released report from Bankrate, 24 percent of Americans have more credit card debt than emergency savings. And 13 percent of consumers don't have any credit card debt; but, they don't have any savings either.
The jobs picture, which is paraded by Wall Street and government as the one bright spot in an otherwise lackluster recovery, just isn’t as rosy as it appears at first glance. According to the Federal Reserve Bank of Atlanta, "The economy has been generating full-time general-service jobs at a much slower pace than in the past." In fact, the economy has 2.5 million more part-time workers and 2.2 million fewer full-time workers than it did at the start of the Great Recession in December of 2007.
Despite what the MSM would have you believe, the economy is more fragile today than at any other time in the past. The virtually free money and QEs provided by many global central banks have caused economies to pile on an additional $60 trillion of debt on top of the already unsustainable and insolvent conditions that existed in 2007.
Sadly, the mindset of governments and central banks remain unchanged from the collapse of the previous two bubbles. Unprecedented money printing and artificially-produced low interest rates have created a perpetual happy hour. And it’s placed all of us at the precipice of a collapse in equities and real estate prices once again.
Naysayers will point to the six-year stock rally as evidence that all is well. And are also quick to point out that record-low bond yields illustrate that investors have complete confidence in sovereign nations to service and pay off their debt. But these are not the results of the free market price discovery process at work. Rather, it is merely the ability of central banks to use the availability of free money to artificially and massively inflate asset prices.
Another reason for today’s complacency is the widespread belief that banks are now properly capitalized—unlike the condition experienced at the start of the Great Recession. U.S. banks, once loaded with insolvent mortgage securities, are now thought to “safely” hold over $4 trillion worth of Treasury, Agency and Mortgage Backed Securities. And, thanks to Basel III and the Dodd Frank legislation, these banks have $2 trillion worth of Treasuries that carry a zero-risk weighting in their capital ratios.
Therefore, these banks only appear to be well capitalized. Once the sovereign debt bubble bursts and investors dump their bond fund holdings, interest rates will soar. Banks will then become capital constrained and will once again be forced to hold illiquid assets that cannot be sold without destroying their balance sheets. In addition, rising interest rates will put a severe strain on the global economy, which is now saturated with a record amount of debt in relation to total output.
Unless you believe the global economy has entered into a multi-decade recession like Japan, interest rates have nowhere to go but up; dramatically. The problem is that debt levels are at all-time highs. Once the cost of money rises this part-time working, no savings, asset-bubble driven and debt-laden economy will collapse. And, the next time the wheels fall off Wall Street’s party bus, the crash will be more severe than 1999 and 2007…combined.