On the one hand, Nouriel Roubini writes,
For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.
Have a nice day, in other words.
On the other hand, we have the Institute for Global Management survey of macroeconomists. In response to the question
What is your estimate of the likelihood that five-year five-year forward inflation compensation will exceed 3 percent at the end of the first week of January 2022?
75 percent of the economists surveyed say that the chance of this is less than 40 percent. And it’s not because they think that there will be a recession.
“For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck.”
Slowly, then all at once. I know I’m not alone in seeing the ‘slowly’. If you do too plan accordingly.
The trick is to just ride the bubble then get out just before it pops.
Don’t forget to position yourself to also get the inevitable bailout when it all goes to hell.
Was there a similar survey of economists about the likelihood of a housing price crash in 2006 or 2007, say?
‘At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.‘
It is funny how backwards everyone gets this when the path is clear every time. It isn’t ‘tighter monetary policies that trigger a bust and crash’ its ‘the loss of confidence causes monetary policy to appear tight’. For the post 1980 recessions the Fed is raising rates during the boom years (except this one) and is lowering rates into the recession. The Fed was lowering rates more than a year before Lehman Brothers, 8 months before Bear Stearns and 4 months before the recession actually started. The tight monetary conditions are the outcome of the early stages of the crash, not policy because markets dominate central banks.
“At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.”
This is TOTALLY unproven.
Part of me believes it’s true.
Then I do the decision analysis (risk speculation) question: it’s 5 years later, there was a “Minsky moment”, but not tighter money. What happened?
One option, of many or just a few?, is that instead of tighter money, the Fed literally prints paper cash, and pays off trillions of gov’t debt with paper currency.
What do the debt holders do with it?
One thing they do NOT do is: buy so many Big Macs that it causes a shortage to make a high demand price increase.
It hasn’t quite happened before, so we do NOT have “history to guide us”.
Another option is to have a big Tax Increase on debt income – those who hold debt pay higher taxes. This might well be a great way to Tax the Rich, since poor folk are not creditors. Then the rich sell their debt to reduce taxes, so the price of debt goes down. This hasn’t quite happened before, so… we don’t know.
All sci-fi readers should be able to come up with some stories — why is any one story so much less likely than the “Minsky moment – tighter money – recession (for the rich? really???)” idea.
I don’t believe Roubini IS correct, tho his guestimate might well be what comes in the future. Less than 40% chance in the next 5 years? Well, looks like more folks are thinking in bets.
I wouldn’t bet on it – neither side. I’m sure we don’t know.
“asset and credit bubbles”
Largest US public corps:
Apple, Microsoft, Amazon, Facebook, Google, Berkshire Hathaway, JP Morgan Chase, Tesla, and Johnson & Johnson
This represents like a quarter of S&P 500 market cap, and there is one bank and the rest of the list basically has zero debt. I mean, it’s not even like, “Oh, they aren’t really that leveraged, compared to normal.” Literally, these firms probably, in aggregate, hold more cash than they have debt.
If the term “credit bubble” can be used in this market, then the concept is not falsifiable. Blaming high share prices on the Fed pushing interest rates down has many problems, but let’s just start with this one. These firms couldn’t care less what the cost of debt was.
Credit bubble refers to the credit in the system not the credit across a portion of the system. Apple can have zero debt but if its revenue is dependent on credit expansion for its customers then any contraction of credit will smash their earnings. Or for a ridiculous example- imagine a company that started out with a ton of cash and financed customers buying their own products, that company would have no debt and would be loaded to the gills with assets, however a contraction in the creditworthiness of their customers would cause their structure to collapse as both their revenues and the collateral value of their assets would dumpy at the same time.
Similarly any company who is experiencing higher earnings due to the stimulus payments from the Federal Government are benefitting from an expansion of credit, without regard to how much debt they actually hold on their own books.
Household financial obligation ratios are on the low side of where they’ve been for the past 40 years (1980Q4 15.09% 1990Q4 16.96% 2000Q4 17.06% 2010Q4 16.08% 2020Q4 14.71%). Yes, this could look worse if rates go up, but that’s always a risk in whatever interest rate environment you’re in – there’s no iron law that says rates can’t go higher. Much of existing debt is mortgage debt, and people can always opt to stay in their current houses with their current mortgages rather than refinance when rates go higher.
Apple can sell its phones for $20-$50/mo and its services are priced at something like $2/month, $5/month or $10/month. A mid-tier iPad costs something like $10/month over a 5 year life and you can probably get a small portion of that back by selling it after you’re done. A decently equipped MacBook Air probably costs something like $25/mo over 5 years, and it will likely have $200-$400 in value left at that point.
Someone deep in the Apple ecosystem who upgrades often probably on net (after selling used products) spends something like $100-$150/month at Apple, which is sustainable for a large part of the country.
Much of the other tech offerings are similarly not that expensive, when averaged out over time, and often tech companies don’t even directly charge the US consumer (who are in some cases the product, not the customer).
If consumers or employers get into serious trouble, we’ve found that FedGov is more than happy to cut them checks. Paul Krugman used to worry about $400 billion deficits under Bush. Republicans fretted about hyperinflation after Obama’s $800 billion stimulus. We’ve discovered in the last 18 months that you can literally do trillions in stimulus with only some negative effects, certainly not hyperinflation.
The system seems sustainable for quite a long time.
Herb Stein’s Law:
“If something cannot go on forever, it will stop.”