Edward Harrison — James Montier: The Advent of a Cynical Bubble

James Montier is one of my favorite market strategists. He is really good on behavioral economics. And his work inspired one of my favorite posts here on 17th century philosophers Descartes and Spinoza. James is also very good on his macro because he understands modern money and the sectoral balances framework of the late Wynne Godley....

Credit Writedowns

James Montier: The Advent of a Cynical BubbleEdward Harrison

 also

We are going from a market protected by the Fed to one in which the Fed is dragging the market in tow. As the Fed has begun lifting rates, the market has consistently proved to underestimate the Fed’s conviction. And I believe this trend will continue, driving interest rates higher. This will, in turn, create equity market volatility.

If this happens, the Fed will likely move aggressively to "prove" its determination. (It's about creating expectations, after all.)

Rising real yields, household debt and ECB tightening
Edward Harrison

Andrew Sheng and Xiao Geng — China’s Live Stress Test

China’s economy has succeeded through trial and error – and the country's recent stock-market collapse should be viewed as part of that process, to be used to drive the next phase of economic reform. One key lesson is that Chinese stock markets remain structurally biased toward state ownership and guidance.

No, China is not going to implode.

Though the blame game is ongoing, the historian Charles Kindleberger’s 1978 book Manias, Panics, and Crashes offers the perfect explanation for what China is experiencing. The economy has undergone a standard cycle of displacement, overtrading, monetary expansion, discredit, and revulsion, all in a matter of less than 12 months.…

This episode proved, once again, that highly leveraged markets are unstable and unsustainable. Financial crises have repeatedly been spawned by inadequately regulated financial innovation, with the combination of market greed and regulatory silos and blind spots enabling booms and busts.

Enter the Austrians.

In China’s case, the government interventionist approach is exacerbating the problem. Though market intervention may limit the scope of losses in the short term, it undermines markets’ ability to self-correct, not to mention the credibility of the Chinese authorities as neutral regulators.

Comes the walk back.

The problem was that retail investors were not equipped to judge the valuation of listed companies like Alibaba, yet they could use margin loans to engage in speculation. This was a dangerous combination – one that would have led to socially unacceptable losses to the retail sectors had the government not intervened. 

Project Syndicate
China’s Live Stress Test
Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong, member of the UNEP Advisory Council on Sustainable Finance, former chairman of the Hong Kong Securities and Futures Commission, and currently an adjunct professor at Tsinghua University in Beijing, and Xiao Geng, Director of the IFF Institute and a professor and senior fellow of the Asia Global Institute at the University of Hong Kong

Wrong as usual, that fool David Stockman doubles down...

That clown otherwise known as David Stockman, former Reagan budget director, is out once again with another over the top, gloom and doom, dumb ass prediction that is based on nothing other than his own, sheer, misguided ideology and frustration.

Stockman is now predicting a stock and bond market crash because "the Fed has reflated the bubble to an even more gigantic proportion."

Here's some more of what he says...

On CNBC's " Futures Now " Thursday, the former OMB Director said that excessive monetary policy has forced central banks all over the world into a corner, and as a result, "the markets are going to be in for a huge, nasty morning after as people begin to look at where we really are." Read more. 

"Begin to look at where we really are?" What the hell does that mean, anyway?

I had several run-ins (here and here) with Stockman in the past when I was still working at Fox. He's a total moron and a ball of contradictions.

Actually, I don't know who is more pathetic, Stockman or that joke of a network, CNBC, for constantly parading losers like Stockman and Schiff around on their air and not ripping them a new one for their years of bad advice and ridiculous predictions. (Hyperinflation, surging gold, spiking interest rates, foreigner dumping Treasuries, depressions, etc.)

WTF is wrong with you, CNBC? Nik Deogun?

The Fed may raise interest rates soon and then it's feasible that bonds will tank although some of that discounting is probably going on now. The interesting thing, however, is what will happen to stocks and the economy if rates are increased? That's a fiscal injection.

What if rates are raised and GDP accelerates? And stocks climb?

What will Stockman and other idiots like Schiff say then? I'm sure CNBC will have them on to "explain."

Stay tuned.

Rob Wile — GRANTHAM: 'The Next Bust Will Be Unlike Any Other'

Grantham blames the Fed for driving asset prices (equities) higher than they would be otherwise through low rates and QE without it resulting in a corresponding increase in capital expenditure. He sees a huge correction in the works. He has previously predicted the bursting of a commodity bubble. That would be a double whammy.

Business Insider
GRANTHAM: 'The Next Bust Will Be Unlike Any Other'
Rob Wile

Marshall Auerback — Bubble Trouble?

There are two parts of the bubble process. First there is a big bull market driven by fundamental and psychological factors. At some point the appreciation goes on for long enough and far enough that all people who try to trade it on fundamentals capitulate. Everyone’s expectations are then driven only by the price pattern. That behavior becomes completely extrapolative. And through several mechanisms that extrapolative behavior becomes non linear.

Macro Bits
Bubble Trouble?
Marshall Auerback

Joe Weisenthal — Robert Shiller: Bitcoin Is An Amazing Example Of A Bubble

 I don't think that Professor Shiller gets it. His generation is not going to use digital currency. They are on the other side of change and don't think digitally. The coming generations grow up in a digital world. Digital currency isn't just going to happen; it's already here. Bitcoin is just the Amazon of the group — at the moment. This story is evolving.

Not that I deny that Bitcoin may be in a bubble. We don't know. What we do know is that Bitcoin is extremely volatile and unless it settles down, it will be mostly a speculative vehicle outside of it advantages as a payment system, in particular an international one.

Bitcoin entrepreneurs need to create a way to short Bitcoin to iron out the bumps. Then people like Shiller could walk their talk by taking a position in "sure thing."

Oh wait, someone has already thought of that.

How to short bitcoins (if you really must) by Simone Foxman at Quartz.

Business Insider

Robert Shiller: Bitcoin Is An Amazing Example Of A Bubble

Joe Weisenthal

Reuters — Robert Shiller, Nobel Winning Economist, Warns Of U.S. Stock Market Bubble

"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Sunday's Der Spiegel magazine. "That could end badly," he said.

The Huffington Post
Robert Shiller, Nobel Winning Economist, Warns Of U.S. Stock Market Bubble
Reuters

Noah Smith — The hard-money people throw Gene Fama under the bus

I think where one does see evidence of prices higher than they would be otherwise is likely in equities were low borrowing rates decrease the cost of margin (leverage). Cost of margin is hugely influential in speculative markets.

Housing "bubble" reigniting? No way. Prices are still way down from their highs, a historically high percentage of purchases of existing residential RE are foreclosure or underwater related and for cash, with Wall Street and flippers big buyers in expectation of exceptional ROI on resale. Rent/purchase ratio is still reflecting the bursting of the bubble, and new housing is not exactly "on fire." There is not going to be another housing bubble in the US for years and there are still housing bubbles to pop abroad.


But it's good to see the inflationistas in retreat and throwing the EMH under the bus, too, in favor of financial instability. But is the Fed creating financial instability now? No way. The Fed is still fighting the consequences of financial instability and not all that successfully.

Noahpinion
The hard-money people throw Gene Fama under the bus

Noah Smith

Michael Hudson — The Bubble Economy as a 2 part play for Privatisation

In place of a new bubble, financial elites are demanding privatization sell-offs from debt-strapped governments. Pressure is being brought to bear on Detroit to sell off its most valuable paintings and statues from its art museums. The idea is to sell their artworks for tycoons to buy as trophies, with the money being used to pay bondholders.

The same dynamic is occurring in Europe. The European Union and European Central Bank are demanding that Greece sell off its prime tourist land, ports, transport systems and other assets in the public domain – perhaps even the Parthenon. So we are seeing a neo-rentier grab for basic infrastructure as part of the overall asset stripping.

This is a different kind of inflation than one finds from strictly financial bubbles. It is creating a new neo-feudal rentier class eager to buy roads to turn into toll roads, to buy parking-meter rights (as in Chicago’s notorious deal), to buy prisons, schools and other basic infrastructure. The aim is to build financial charges and tollbooth rents into the prices charged for access to these essential, hitherto public services. Prices are rising not because costs and wages are rising, but because of monopoly rents and other rent-extraction activities.

This post-bubble environment of debt-strapped austerity is empowering the financial sector to become an oligarchy much like landlords in the 19th century. It is making its gains not by lending money – as the economy is now “loaned up” – but by direct ownership and charging economic rent. So we are in the “economic collapse” stage of the financialized bubble economy. Coping with this legacy and financial power grab will be the great political fight for the remainder of the 21st century.

Michael Hudson
The Bubble Economy as a 2 part play for Privatisation

China hard landing?

Inquiring minds are reading an excellent report China Real Estate Unravels by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, China.

Read it at Mish's Global Economic Trend Analysis
Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge

by Michael "Mish" Shedlock

Numerian — Just One Last Bubble, Please!

Read it at The Economic Populist
Just One Last Bubble, Please!

Submitted by Numerian

Bubble in Education? Dr Housing Bubble Thinks So

"The explosive growth of student loan debt is troubling for a variety of obvious and not so obvious reasons. More needed attention is being drawn to higher education and questions are being sharply directed at the way college education is financed. The bubble in higher education has similar parallels to the bubble experienced in housing. Owning a home is a good thing and has been part of our national identity for close to a century. Yet during the mania very few questioned the method of financing this otherwise solid financial investment. It all depends on how you finance the purchase. The same dilemma is occurring with pursuing a college degree. Very few will argue that going to college is a bad idea. Knowledge is power as we all know. Yet is it necessary to go to a school just because they added a $10 million Olympic sized pool? The additional bells and whistles are similar to the peak bubble days in California where sellers tried to convince buyers that the new whirlpool and granite counter tops added tens of thousands of dollars in value. Value by what standard? Most of the mania was fueled by easy access to debt greased by Wall Street and backed by the government. The fact that we are approaching $1 trillion in student loan debt is staggering...."

" 'Every person should have a college degree' which rings eerily similar to 'every person should own a home.' At what cost? The only reason this is happening is because of Wall Street and government backed loans. Thanks to this new model, the for-profits are operating in the new world of subprime colleges. Yet there is no walking away from student loan debt which puts an albatross on an entire generation of college students. Will these people even be able to purchase a home in the future? Will their degree actually increase their earnings potential?"

Read the whole thing at Subprime colleges – Student loan debt now equivalent to 7 percent of U.S. GDP. For-profits claim Harvard bragging rights and that barbers can make $150,000 to $250,000 a year to lure students.

Trader's Crucible is on a roll

Trader's Crucible adds a follow-up to recent posts, Chapter 3: In which Mr. Rowe proves his worth. Read the comments, too.

Dian L. Chu: Why Monetary Policy Is A Blunt Instrument

Dian L. Chu posted, Excess Liquidity & Cheap Money Runs Rampant on Wall Street, at EconMatters.com, which reinforces MMT's position that monetary policy is a blunt instrument.

"In short, the Fed cannot do anything fast, let alone making monetary policy changes at the first sign of bubbly market conditions like we have today as exemplified currently with runaway food and energy prices.... This has always been one of the drawbacks to the U.S. monetary system--the Fed over compensates in markets through excessively lopsided market intervention, which inevitably just creates another unintended consequence down the line.

"We are just now working through some of the vestiges of the last housing bubble created by excessively loose monetary policy, and lo and behold, we are creating yet another inflation bubble in food and energy with a new round of excessively loose monetary policy.

"What is that definition of insanity, doing the same thing over and over again, and expecting different results? And here we are—trapped in this seemingly never ending cycle of bubble creation....will we ever learn?"