[fred, i didn't know where to post this. it certainly is not "news." so i put it here. feel free to move it somewhere else if you think there's a more appropriate forum for it.]
i've been thinking about this question for a while: where's the bubble?
For some time myanswer was bonds, but I realize that it's really all financialassets, every FIRE asset with the possible recent exception ofcommodities. Very high end luxury condos in nyc can sell for over$100million, and about half the high end sales are to llc's, hidingthe real buyers' identities. It is believed these llc's are screensfor foreign buyers wanting to place and hide assets in the u.s. Thebond market keeps surprising by finding more reasons to drive ratesdown further and bond prices further up. the global equitiesmarkets are still at very high levels historically, albeit they are feeling some stress lately.
What has powered thebubble, of course, is q.e. in all its global flavors. The cb's havebeen successful in keeping the money in the financial markets and asmuch as possible out of the real economy. They don't think assetinflation “counts,” and they are still keeping down the kind ofinflation [wages, really] they do recognize.
So here I want toinsert something I wrote in May, 2003, because I want to update it.
Originally Posted by jk
I still think wehave dys-flation with segments in inflation – FIRE assets – andsegments in deflation – the real economy, especially real wages. This follows the structure of ej's diagram of the mostly separateFIRE economy and the production/consumption economy. [I haven't beenable to find that diagram. Metalman, are you still here?]
the question we haveis whether the FIRE inflation will spill into the real economy – asit has in real estate, especially high end, for example. Or does thedeflation in the production/consumption economy spill into financialassets – as it has to some degree lately in global equity markets,and as it has to a greater degree in financial assets tied tocommodity prices. Or do the world's puppet masters somehow continueto stagger ahead between these possibilities?
This process hasbeen evolving for much longer than I thought possible, albeit with acouple of scary near-catastrophes along the way. Witness the factthat my old note inserted above was written 12 years ago. So perhapsthis can go on a great deal longer.
This ever-pending,never-happening but potentially huge crisis also characterizes thedollar. Anybody holding their breaths lately, waiting for the end ofthe dollar-centric global monetary system?
If this system isgoing to destabilize, will we be able to identify that process earlyenough to protect ouselves or even profit from it? In the late1990's it was easy to see that there was a tech bubble, especiallythe dot com bubble. In the mid 2000's it was easy to see there wasa housing bubble. In both cases it was hard to predict what wouldtrigger the end of those bubbles, or when they would end, but theirfuture was pretty clear.
Now, faced with abubble in all FIRE assets, it is still hard to know what mighttrigger its end. And it is even harder to think of where to hide. If all assets are up, then – pace finster – it is the same assaying the dollar is low. Finster's fdi has been rising lately, butit is still very low in a broad historical context. Saying it willcontinue to rise, and rise markedly, is saying that the deflation inthe production-consumption economy is going to “win” in thisstruggle of countervailing forces. Hold cash. Or maybe a spike inthe fdi is just the “ka” to be followed by a “poom.”
many years ago thissite hosted deep discussions about what was going on in the economy. We haven't been having those discussion lately, I think at least inpart because of the artificiality of the current economicenvironment.
But if we step backfar enough, and look at a broad enough picture, perhaps there issomething to discuss after all. At a minimum, we can look for earlysigns of bubble destruction – like the bankruptcy of those 2cdo-based bear stern hedge funds in '07, presaging the carnage of'08. we might also address the question of whether, in thisabnormal, manipulated, “disney exhibit” economy, we can justallocate assets as if the economy were normal. or is something different enough to require some other strategy? if so, what?