The Big Problem Ahead
23 December 2016 | Pago Pago, American Samoa
Many more are coming to share Yale economist Robert Shiller's view that this is the first time, unlike 1929, that stocks, bonds and housing are all overvalued and bubbled up at the same time.
The best conventional guess of Shiller, two fund managers I know and many others, is the boom in stocks will continue for a bit, but a major correction in stocks, bonds and secondary housing is coming, if not a multiple crash, Bonds are already in trouble and stocks seem a bit stalled out around the DOW 20k level. The psychology of the Trump effect can only take us so far.
There is a basis to being bearish currently. A three way mega crash is a possibility, as Shiller implies but dares not say and others worry about silently. The Great Recession did not adequate correct matters because it was nipped in the bud by bailouts and stimulus programs. We would have had the second Great Depression but for them, but the point is the corrective job did not get done.
The situation needs to be considered in its context, something most don't do. The truth is trillions have been poured into the economy by the Fed in recent years by QE and other easings and most of it has not been spent on more consumption or much more real investment. It has spent on pushing up cash holdings, the prices of passive assets (read stocks and bonds) and secondary housing. ZIP has not helped either but, by them, the Fed has accentuated these bad developments.
The rich and wealthy, and the corporations they own and control, do much if not most of the hoarding in cash, as well as in passive investments in the secondary financial markets and some also in the secondary housing market. The amount of just cash in the hands of households, banks and corporations is at an all-time historic high, some $18 trillion in all. Hoarding in passive investments of stocks and bonds is in the mega trillions. Hoarding in the secondary housing market as a store of value is also in the trillions. This is a bubbled asset economy and it is in trouble. Trump hasn't a clue. Neither does the Fed, really.
Much of this hoarding is by the rich and wealthy, but not all of it. As their incomes and wealth grow disproportionately, they hoard disproportionately more of national income and wealth and so less is spent on consumption and real investment and more is add to these hoards each pay period or quarter. The consequence, when coupled with the Fed's QE, other easings, and ZIP, is asset bubbles have developed in stocks, bonds and secondary housing because that is where they have diverted their monies to and they continue to bubble up.
We are poised for an inevitable and major collapse, the probability of which grows daily unless these bubbled markets undergo major corrections, but where is that money if withdrawn from those markets to go except into more cash, already held in excess. The Fed has created a huge inflation in passive assets which is what the three bubbles are. The corrective measure, sure to produce a recession, was once referred to as "sucking the excessive reserves out of the system," but is now more simply to suck the excess hoarded cash out of the system. Problem is, if done by conventional means that will create a liquidity crisis for everyone but the mega hoarders. A tax on cash hoards would do better, but whose minds are even thinking in these directions or understand the problem?
For the most part, America. its leaders and most economic and other observers do not even have a fucking clue about what has been going on or what is ahead.