Tuesday, January 26, 2010

The next bubble?

Cf.:  The Total Debt Relative to GDP Trumps Everything Else – Comstock Funds

Comstock has published Ned Davis’s charts on total debt/GDP for years.  They wonder why no one among the financial pundit (i.e., dunce) class can see the elephant in the room.

Barron's magazine printed the first part of its annual Roundtable discussion of 2010 this past week.  We noticed that many of the participants were very concerned about the debt (mostly government debt while we think total debt is a much more useful metric).  Marc Faber, in fact, talked about a 7,000 word New York Times article by Professor Paul Krugman.  He stated that the article "How Did Economists Get It So Wrong?" never mentioned that excessive credit growth or leverage was the cause of monetary instability and brought about the financial crisis.  Bill Gross stated that by lowering interest rates we promote consumption instead of manufacturing.  Central bankers were forced to respond with liquidity to a problem that developed over the past 25 years.  There was more discussion of credit growth (another way to say debt growth) in the macro analysis that is always presented in the first part of the three Barron's articles of the Roundtable.  The amazing thing to us is that most of the roundtable participants understand the same problems we talk about almost every single week, yet are mostly very positive on the market for 2010. 

It seems that most of the roundtable participants understand the debt problem we have been talking about for the past 14 years. The worst period of the debt explosion started with the outrageous internet bubble in the late 1990s, continuing through the correction in the internet bubble, then the housing bubble which should have been obvious to everyone (even the Fed) and then the financial crisis of 2008.  We are astounded that we have the potential for another bubble in the stock market now.  We expected the rebound from a much oversold market in March of 2009, but not a 70% rebound from the lows.  We don't believe it is possible to fool the investors in the US stock market one more time. Especially this close to the 2003-2007 and 1996-2000 bubbles. 

They expect competitive devaluation as I do in what I call the “supernova of Bretton Woods.”  See the pdf on “The Cycle of Deflation.”  However, I am more concerned that desperate governments will resort to war, a tried and true inflation-starter, to counter currency appreciation due to deflation.  You’ve got to have inflation to devalue your currency under floating rates.

Anyway, their bearish view of the US stock market matches mine, and raises the question:  What will Ben’s (or whoever’s) next [asset] bubble be, the chances for wage-price spiral being about nil as the jackboot comes down on the labor market Big Time?

I am going to guess it’s Oil.  Goes hand-in-hand with geopolitical instability.  But as I wrote in the last “animal spirits” update, we’re likely to experience a period of eerie calm (and further deflationary real estate wreckage as the next wave of resets hits) before any wage-price inflation happens.

This is not to say that there is no inflation.  Anyone who buys gas or goes to a grocery store can see it in their monthly budget.

Total Debt (Public & Private) Relative to GDP
The Cycle of Deflation

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