The Care And Feeding Of Bubbles

March 4, 2020

Oops, the coronavirus expanded into a bubble of illness and deaths. Like all bubbles, financial or otherwise, this one will expand, burst, collapse and cause collateral damage. When will the “everything” bubble collapse? When will the coronavirus be contained? How much damage will these bubbles inflict upon the economy, people and personal savings? We don’t know. Stay tuned.

BUBBLES IN THE PAST—WHAT HAPPENED? (weekly data)

Market              Low          Date              High        Date      Subsequent Loss

NASDAQ 100     956         Jan. 1998     4,691          Mar. 2000       82%

Silver                   6             Jan. 1979        50*          Jan. 1980        89%

Bitcoin               30            June 2011    19,343        Dec. 2017       69%

Deutsche Bank 25            Mar. 2003      111            May 2007      84%

Microsoft           10             Dec. 1997        37            Dec. 1999       62%

Dow in 1929    137             Apr. 1926        380          Aug. 1929       89%

Crude Oil           53             Jan. 2007          145         July 2008        75%

Palladium        180            Feb. 2005         572          Feb. 2008         71%

JDSU                  70              Oct. 1998       1,200        Mar. 2000      100%

Apple              0.41             Dec. 1997          4.30         Mar. 2000      79%

*Daily high

GRAPHS –EXAMPLES OF PAST BUBBLES AND COLLAPSES

GRAPHS –EXAMPLES OF CURRENT BUBBLES AND COMING COLLAPSES

WHY DO BUBBLES HAPPEN?

Bubbles expand for many reasons, but they always include:

  1. TOO MUCH EASY CREDIT. Examples: Central bank levitations via massive QE, fractional reserve commercial banking, leverage in futures markets, and margin loans for stocks.

  2. COMPELLING STORIES WE WANT TO BELIEVE. Examples: House prices always go up, the Fed has our back, the Greenspan put, the Powell put, a strong economy, we owe the debt to ourselves, unlimited potential with internet stocks, more eyeballs mean huge profits, tax the rich, global warming, lots of cash on the sidelines, fear of missing out (FOMO), low interest rates forever, government stimulus, shovel ready projects, necessary wars, anonymous crypto currencies, the damage will be contained, the virus will not spread… and the beat goes on, but it’s mostly false. “Find the Trend Whose Premise is False and Bet Against It.”

  3. Continual growth on a finite planet. Obviously false. Trouble coming.

  4. Debt and deficits don’t matter – they can always grow larger. Clearly false. Hyperinflation anyone?

  5. The Fed will digitally create trillions of currency units with minimal long-term consequences. Not true.

  6. The shale oil boom produces no profits while creating massive and expanding debt. What could go wrong?

Read: Charles Hugh Smith “The Pandemic Isn’t Ending

The more authorities try to mask reality to maintain confidence, the more they destroy credibility, confidence, trust and faith. Once these intangibles are lost, the loss of confidence is self-reinforcing.

Depression isn’t just an economic number. It’s a self-reinforcing loss of confidence. Do you really think quarantining 400 million people will stop the pandemic?”

CONCLUSIONS

  • Bubbles always implode. Many bubbles exist now in early 2020. Expect implosions. There will be collateral damage.

  • The Fed and other central banks blow bubbles by creating excessive credit—new currency units—and manipulating interest rates too low via their central planning. When has central planning by a team of bureaucrats (or economists) worked well for anyone but the political and financial elite?

  • The coronavirus pandemic will have direct and secondary consequences for individuals, countries, markets and economies. The risk of bubble implosions will increase. Coronavirus consequences could be the “pin” that pops many bubbles. The virus will be used as a believable scapegoat for a stock market crash, currency weakness and failing central bank policies.

  • Ayn Rand: “We can ignore reality, but we can’t ignore the consequences of ignoring reality.” We can ignore bubbles and pandemics, but we can’t ignore the consequences of bubbles and pandemics.

  • Gold will be the “last man standing.” Central banks, “inflate or die” policies, and their fake currencies cannot protect markets from a spreading virus, shale oil depletion rates, overwhelming debt, ever-increasing losses, diminishing solar output, unwise governments, failed banking policies, environmental destruction, and expensive wars.

Miles Franklin will sell gold and silver in exchange for fiat currency units that devalue every year. Bubble implosions will increase global demand for real money—gold and silver. Protect your savings and net worth with real money.

Gary Christenson

The Deviant Investor

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GE ChristensonGary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of the book, “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy and central banking.

Silver has the highest electrical conductivity and heat of all metals.

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