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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (44944)	1/22/2006 7:28:11 PM
From: Perspective	Read Replies (4) \| Respond to of 116555

<1) form a new bubble elsewhere> I've thought about this a lot, particularly in view of the extraordinarily remote odds I gave the Fed of preventing the resolution of the Y2K bubble. Since they in fact did succeed in actually blowing a bigger bubble as the stock bubble was trying to correct itself, I've tried to understand why and how they were successful, and imagine a scenario under which they could deliver a similarly unlikely rescue of the housing bubble. I see that we have witnessed a succession of "bubbles". The real bubble, as has been the case in all bubbles I've studied, is a debt bubble. When excess debt is created - excess defined as too quickly relative to the size of the economy involved - it impacts pricing. It may flow into bonds, it may flow into stocks, it may flow into finished goods, or it may flow into real estate. It creates bond bubbles, stock bubbles, commodity bubbles, and real estate bubbles. They can happen in succession or in tandem. What makes it so dangerous is when it flows into leveraged assets such that positive feedback begins to kick in. Rising asset prices permit additional debt creation, which feeds further asset price increases. Of course, you already know all that too well. What I hope to add to the understanding here is this: you can only keep the debt bubble growing as long as there is another asset class of sufficient size to inflate. You can get a bubble to grow by lowering interest rates. By doing so, you can force rising bond prices and build a bond bubble. Similarly, you can foster a stock market bubble. Or, you can foster a real estate bubble. I think this last case has the distinction of being the ultimate bubble. No other asset class I can think of represents so large a stock of leverageable wealth as real estate. Think about it: how much of the country's collective assets are represented by real estate? And is there ANY other asset out there where you can put 5%, 3% or even ZERO collateral down for purchase? Real estate is the ultimate bubble. No other asset class comes close in terms of overall size or leveragability. And add to that, no other asset class has anything approaching its ability to distort economic behavior. Real estate touches every corner of the economy - geographically, demographically - it is everywhere. It's no wonder the wealth effect of real estate is so huge; well over half the populous participates in the bubble, like it or not. Consequently, it is unmatched in its ability to produce massive distortions in consumption, investment, and job creation. Since before 2000, I doubted that our bubble would unfold as previous bubbles had. Our Fed had "learned", but I wasn't sure just what they had learned or how it would change outcomes. What they learned is to rescue a failing stock bubble with a real estate bubble. Now, the big question is whether anyone knows how to rescue a real estate bubble. There is no doubt in my mind; unless there is another asset class of greater size and importance, there is no way to rescue this bubble. When real estate implodes, there really is no way to save the debt bubble. BC

To: mishedlo who wrote (44944)	1/22/2006 7:53:21 PM
From: Perspective	Respond to of 116555

THE GREAT 'FLATION DEBATE While I was out surfing this morning, I had a little insight on the Great Flation Debate. I think most who understand the gravity of the debt bubble forsee instability in pricing - a time of rising prices, a time of falling prices. Both inflation and deflation may happen, it's just a matter of timing. I see the potential for both. Personally, I see this present inflation ending very soon. Deflation is imminent, but I'll allow a hyperinflationary distant future as authorities battle the economic drag of collapsing debt-driven demand. What I realized as I was paddling back out follwing one of the outstanding waves this beautiful Sunday morning was this: hyperinflation can't happen UNTIL the authorities are actively engaged in unconventional measures to fight a shrinking debt bubble. So, to all those who posit an inflationary outcome due to official efforts to "print money", I say this: until the authorities are actively engaged in unconventional measures, the normal business cycle will reign. What we are seeing now is normal, cyclical inflation associated with stimulative interest rate policy. As the stimulus is removed - or even if it is just under basic market-corrective forces - the inflation will again decline cyclically. However, with it so low to begin with, and with the absence of another interest-rate sensitive asset class to inflate, deflation is imminent. Those expecting inflation may be right. Perhaps the government will respond with a tax on cash to force interest rates "below zero". Perhaps they will resort to massive deficit spending with immediate monetization by the Fed. Perhaps the government will even step in and buy collapsing real estate assets to stem the flood. Perhaps. But UNTIL they are doing so, standard market forces will reign, and those are lopsidedly slanted toward deflation. Until there is concerted unconventional action - taxes on cash, massive monetization of deficit spending, or substantial government real estate purchases - little additional monetary stimulus will be created via conventional measures, and deflation will reign. Consequently, I forsee little additional benefit to be gained by inflationary plays such as stocks and commodities, and large potential risks. Significant monetary stimulus will only be created IF AND WHEN the authorities go into panic mode. And despite fears of a rush to currency debasement, the fact is that the authorities will only resort to unconventional measures when deflation is already active, or when they perceive it to be imminent. And inflationary asset plays will only respond to such action when market players witness such unconventional measures, or perceive that they are imminent. So, wait for the unconventional measures to be imminent before considering betting on the hyperinflationary outcome. In the words of someone long, long ago: "Don't fire until you see the whites of their eyes" - deflation-panicked eyes, that is... BC