Bubbles and History, Harshly Rhyming

Mark Twain’s old adage that “History Doesn’t Repeat Itself, but It Often Rhymes” by my reckoning has never been more accurate with respect to the markets (both stocks and housing) but the difference between this cycle and the last is not just measure and verse but a long list of ever accumulating liabilities that will make this a harsher passage.

In many ways today’s economic climate bears a striking resemblance to the conditions that existed prior to the 2008 financial crisis.

Both periods saw historically accommodative central bank policies enacted to combat “temporary” crisis (then, the dot-com bust/911, now 2008 crisis itself and COVID-19 book-ending the expansion) leading to obviously overheated conditions (in both stocks, housing and other assets) and then, finally, an accumulation of substantial head winds and a complicit Federal Reserve peddling “noble lies” in an feckless effort to obscure the severity of the situation.

In 2007/08, Bernanke continuously insisted that “sub-prime is contained” while it obviously wasn’t, and the market bought that notion, until it didn’t.

Today, Powell pushed “inflation is transitory” while it also was obviously not, and the market bought that notion, until now.

With the bear market pattern in stocks firmly established and a sell-off underway, we are currently experiencing a 2007/08-like recognition of the liabilities that have accumulated and the systemic risk they pose.

One key point of difference though is that in 2007/08 the threat came as a result of the fallout associated to the bursting of the “Housing Bubble” while today, we are seeing a burst of the “Everything Bubble”.

Coming as a direct result of the Federal Reserve and Federal Government’s (as well as their global counterparts) reckless efforts to bail out bag holders and prop up the failed economy in the wake of the “Great Recession”, these fraudulent “authorities” sowed the seeds of what will likely be seen as the single greatest economic calamity in human history.

Fearing the political consequences of the economic reckoning that was the housing downturn, the Feds embraced a policy of fiscal stimulus and money-printing the likes of which has never been seen and the scale of which most Americans don’t fully understand.

The Fed not only supported the financial system through their conventional policy tools (Fed Funds rate, lender of last resort, discount window), they implemented unconventional measures (quantitative easing) that saw them purchasing trillions of dollars of mortgage securities and treasury securities from the Treasury and Federal agencies thereby directly funding much of the expansion seen since 2008.

Where did this money come from to fund all of this economic activity?

Nowhere. This “money” was just bits on the Federal Reserve’s digital balance sheet.

To put this in perspective, just the $2.715 trillion minted for mortgage backed securities alone is the equivalent of over 1 million American households’ lifetime earnings.

But the Feds money creation provided no additional productive output… there was no real production associated to this effort, it was just more “hot” money available to chase existing goods and services as well as stimulate a multitude of options for mal-investment.

So, it is no wonder that we are living in a time where bubbles abound… stocks, housing, cryptos, NFTs, Robinhood… the peak of the Everything Bubble brought boundless optimism for fast money across a host of asset classes and markets.

But with this period drawing to a close and the Feds hands tied by un-tethered inflation and their credibility now firmly debased, how will the “authorities” respond to the oncoming economic calamity?

My guess is not very well.

Aside from purely economic considerations, we now have a population deluded into believing the false notion that our federal authorities with their seemingly unending largess can ALWAYS step in to blunt any turmoil.

From my perspective, we have stretched this falsity about as far as conceivably possible and are likely moving closer to a period where we all will learn hard lessons in the fundamentals… lessons that we should have learned last cycle.

This downturn will be harsher and more punitive as the fiction of limitless economic engineering gives way to an unforgiving reality.

Stocks down, Housing down… Everything down.