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History of Asset Bubbles Past 40 Years


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This is an outstanding post on ZeroHedge. I'm not going to post all the charts go to the URL to see them but it's interesting especially for the waverer's/non-believers in HPC (or trolls ?)

Quote

 

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats.

The conventional view is the Federal Reserve creating trillions of dollars out of thin air will trigger inflation. Not so fast. Yes, creating trillions of dollars out of thin air will eventually devalue the purchasing power of each dollar--what we call inflation--but first all the unprecedented asset bubbles will pop and valuations will crash.

Let's call this a deflationary deluge as unsustainable asset prices are eroded by a hard rain of reality. To understand the enormity of the current bubbles, please glance at the charts below. The first chart depicts recent stock market bubbles; note the extreme height of the current bubble.


Real estate and other assets have also soared in unprecedented bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now supposedly worth over $1 million.

What made this possible? An equivalent bubble in debt. Every sector--household, corporate and government--has borrowed astronomical sums of money to keep the bubble economy glued together. In this rising tide of currency and capital, whatever had scarcity value--real estate, art, stocks--was purchased with the borrowed money as a store of value and / or as a source of income in a world starved of low-risk yields by central banks that dropped interest rates to near zero.

Assets don't have to rise, but the interest and principal on debt has to be paid. That's the rub with buying assets with borrowed money.

The price of assets is set on the margins. In a neighborhood of 100 houses, the price of all the houses is set by the most recent handful of sales. If each house was valued at $1 million, and three houses sell for $800,000, the value of the other 97 houses falls to $800,000 each.

All bubbles rely on a greater fool willing to pay a higher price than the previous somewhat lesser fool. The problem is the supply of greater fools quickly drops to zero when euphoria is replaced by fear and the marginal buyers are no longer willing to pay outlandish sums for houses, stocks, boats, etc.

Every greater fool who abandons a market sticks a pin in the bubble. As prices start eroding, those who bought the over-valued assets with borrowed money start realizing they have to make the interest payments even if the asset is losing value. The only rational choice is to run to the exit and sell the asset.

But since so many recent buyers bought with borrowed money, the exit is quickly jammed with desperate sellers. This triggers market crashes as marginal buyers desperate to sell will drop their price, while the delusional herd still believes the bubble valuations are not just fair but "under-valued."

This is why the majority refuses to sell until it's too late. They believed the fairy tales that "real estate never drops," Apple is a bargain at $300 (see chart below), etc., and are unwilling to suspend those beliefs even as the deflationary deluge washes away their wealth.

By the time they realize the impossibility of getting their wealth back, it's too late to do anything other than salvage what's left by selling now rather than later.

Bubbles tend to rise and drop in rough symmetry, meaning they tend to retrace the entire bubble, though the descent is often much faster than the ascent.

The greatest fairy tale of them all is the Fed has our back. The belief here is that all the dollars created out of thin air by the Fed will flow into stocks. But there is no actual causal mechanism in this belief; the Fed can create dollars out of thin air but they don't have to flow into the stock market; they can go elsewhere. They only flow into stocks because the financiers, banks and other parasites and predators are counting on greater fools to pay ever higher prices for stocks based on their erroneous faith that the Fed's new money magically goes straight into stocks.

Once the pool of greater fools dries up, stocks crash regardless of what the Fed does or bleats, up to the point that the Fed is given the legal go-ahead to buy stocks directly. That's when the inflation everyone anticipates will begin. But inflation is just as unruly a beast as an asset bubble, and control is never quite as complete as the Fed claims.

First the deflationary deluge, then the tsunami of inflation. Both destroy the wealth of believers in fairy tales.

 

More (including charts etc)

https://www.zerohedge.com/markets/first-deflationary-deluge-assets-crashing-then-tsunami-inflation

 

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15 minutes ago, Warlord said:

This is an outstanding post on ZeroHedge. I'm not going to post all the charts go to the URL to see them but it's interesting especially for the waverer's/non-believers in HPC (or trolls ?)

More (including charts etc)

https://www.zerohedge.com/markets/first-deflationary-deluge-assets-crashing-then-tsunami-inflation

 

HPC's durhamborn might have written that.

I'm not entirely comfortable with the metaphor of money going into equities, like air going into an inflating balloon. Money goes through markets - for every buyer there's a seller

It's the quantity of money going through, and its velocity, that sustain equity markets, so a better metaphor is maybe a jet of water supporting a ping-pong ball at a certain height.

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There is of course another factor thats missed out... Rent. 

If your rent is £1000 pcm but even on the insane House price you can get a 25 year mortgage, rate fixed for 10 with repayments at £900pcm are you a fool for taking it? 

Comparing prices 20 years ago when credit was so much more expensive and today misses the point and runs into what i want to believe terrority. 

Just my two cents. 

 

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2 hours ago, captainb said:

There is of course another factor thats missed out... Rent. 

If your rent is £1000 pcm but even on the insane House price you can get a 25 year mortgage, rate fixed for 10 with repayments at £900pcm are you a fool for taking it? 

The reality is that's no longer the case, unless BOMAD or somehow you land a big deposit.  For the last 5yrs+ its been far more economical to rent despite having the readies for a deposit, even at looney SE prices, home of the ponzi scheme perhaps.

To answer your original questions - most are conditioned to think saving £100/m with "cannot lose on housing" HPI.... well, you've seen prices lately.... mentally most would think its a bargain and jump in 2 feet in.  

2 hours ago, captainb said:

Comparing prices 20 years ago when credit was so much more expensive and today misses the point and runs into what i want to believe terrority. 

Much depends on if you think the magic money can continue forever and ever and ever.  There are a few of us who don't think its possible without some kind of horrific side effect (such as hollowing out the real economy... oh wait...) which eventually leads to its own demise.  Again, granted, so long as the masses have job security and see it "cheaper than renting" then for now at least up it goes.

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4 hours ago, Warlord said:

This is an outstanding post on ZeroHedge. I'm not going to post all the charts go to the URL to see them but it's interesting especially for the waverer's/non-believers in HPC (or trolls ?)

More (including charts etc)

https://www.zerohedge.com/markets/first-deflationary-deluge-assets-crashing-then-tsunami-inflation

 

That article is beautiful. It's going on my wall. If it plays out, its going to be nerve-wrackingly brilliant

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1 hour ago, blackhole said:

The reality is that's no longer the case, unless BOMAD or somehow you land a big deposit.  For the last 5yrs+ its been far more economical to rent despite having the readies for a deposit, even at looney SE prices, home of the ponzi scheme perhaps.

To answer your original questions - most are conditioned to think saving £100/m with "cannot lose on housing" HPI.... well, you've seen prices lately.... mentally most would think its a bargain and jump in 2 feet in.  

Much depends on if you think the magic money can continue forever and ever and ever.  There are a few of us who don't think its possible without some kind of horrific side effect (such as hollowing out the real economy... oh wait...) which eventually leads to its own demise.  Again, granted, so long as the masses have job security and see it "cheaper than renting" then for now at least up it goes.

In london and even more so in the south east, mortgages at todays rates are significantly cheaper than rents including the capital payment each month. Capital repayment being a small advantage over a rent payment... 

Have to remember you can get a five year fix under 2%... Even with 80% LTV. 

Get your point reference deposits but that's why transaction levels have been so low. That will continue 

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4 hours ago, captainb said:

There is of course another factor thats missed out... Rent. 

If your rent is £1000 pcm but even on the insane House price you can get a 25 year mortgage, rate fixed for 10 with repayments at £900pcm are you a fool for taking it? 

Comparing prices 20 years ago when credit was so much more expensive and today misses the point and runs into what i want to believe terrority. 

Just my two cents. 

 

+1

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On 30/05/2020 at 21:31, captainb said:

In london and even more so in the south east, mortgages at todays rates are significantly cheaper than rents including the capital payment each month. Capital repayment being a small advantage over a rent payment... 

Have to remember you can get a five year fix under 2%... Even with 80% LTV. 

Get your point reference deposits but that's why transaction levels have been so low. That will continue 

I'd imagine trying to get such a mortgage at the moment would prove tricky, even if you had the deposit to hand.  There's now an emergency budget in July to "help" with the impending wave of millions of job losses.  

Lets not forget that WFH means "oh, so we dont need UK office workers doing all this admin?" too.... 

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  • 416 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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