Tuesday, July 29, 2014

The Next Bubble

Hat Owner Glenn discusses "The Money Bubble," as presented by USA Today:  Is the Fed Fueling a Giant Stock Market Bubble?

I think Glenn is wrong when he says this is the "last" bubble.  Bubbles will always occur.  Partly because of the business cycle and always changing monetary and lending standards. Partly because there is never true equilibrium in a market economy. 

I think Glenn makes a good point when he says his timing is always off.  When I started Ushanka nearly 8 years ago, I naively made a point to seek out timing estimates from "experts."   I learned over time that some are sincere, like Glenn, and others are seeking attention.  They are always wrong.

Here is the chart Glenn is using:

Here is a chart from ZeroHedge - same message but measuring the San Francisco housing market:

My current gold standard studies have helped me understand what comes next.
Default - Interest rates will rise to the point where the US cannot afford to pay its debt payments.  Miss a payment = default.  The sky does not fall.  It is just bankruptcy at the national level, and it happens quite often - albeit not to the US.  (Watch Argentina - the next to likely default.)  We'll restructure our debt, likely reducing it by half or so, then start making the new payments with promises of better fiscal discipline going forward. 

Monetary Policy - Major disruptions have led to monetary policy reform in the past.  Only the Libertarians and a few of us Republicans understand what a gold standard is and how it could work if executed properly.  We amount to roughly 2%, and therefore will not get what we want.  What I predict will be a "new and improved Fed" who will promise to implement tighter controls over a fiat currency, which may last a decade.  Again, the sky does not fall.

Bail In - This is when the government decides to nationalize a portion of bank deposits or other assets from its citizens to apply to the debt emergency.  (See Cyprus and the Asset Seizure Risk Cube.)  They might disguise this by issuing a new currency.  For example, a new dollar for ten of the old dollars.  Another:  negative interest rates where you get to pay the bank to hold your money.

War - Like bubbles, wars happen.  Remember, until recently, war was the natural human state of affairs.
What can we do?  Here is some advice I've seen and heard.  Of course - do your own homework.
Stop Losses on all stock investments.  One scenario is that the drop will happen fast.

Sell some stocks and hold the proceeds as cash.  Safer, but understand the SEC just made money market accounts a whole lot riskier.

Understand inflation is around 6% now, and may go a bit higher.  I reject the talk of 'hyperinflation' as the US Dollar is far too stable for that even with the Fed's money printing.  But realize every dollar in savings, and in your wallet, is losing 6% a year - right now.  So even holding cash isn't necessarily the right thing.

Get as debt-free as you can.

Plan on a lower quality of life.

Make the best of it:  Family, friends, faith.  And consider mocking those who gave it to us with a Commie Obama hat...

This change brought to you, on purpose, 
by Barack Obama and the Democrat Party.

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