Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Stock bubble'

Tag Archives: Stock bubble

Could The Markets Crash Again? | Zero Hedge

Could The Markets Crash Again? | Zero Hedge.

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”

Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).

Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.

The Tech bubble was a stock bubble.

The 2007 bust was a housing bubble.

This next bust will be the sovereign bond bubble.

Why does this matter?

Because of the dreaded “C word” COLLATERAL.

In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.

This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.

This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).

Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.

The reason?

The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.

WHAT DOES THIS HAVE TO DO WITH TODAY?

The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.

By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.

SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?

Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.

At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.

This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…

THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.

To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:

1)   The Grand Monetary experiment of the last five years is ending.

2)   THE Crisis (the one to which 2008 was just a warm up) is beginning.

 

For a FREE Investment Report outlining how to prepare for another market crash, swing by: www.gainspainscapital.com

 

Best Regards

 

Phoenix Capital Research

Could The Markets Crash Again? | Zero Hedge

Could The Markets Crash Again? | Zero Hedge.

This is the trillion-dollar question. From a common sense perspective, the simple answer is “absolutely!”

Since 1998, the markets have been in serial bubbles and busts, each one bigger than the last. A long-term chart of the S&P 500 shows us just how obvious this is (and yet the Fed argues it cannot see bubbles in advance?).

Moreover, we’ve been moving up the food chain in terms of the assets involved in each respective bubble and bust.

The Tech bubble was a stock bubble.

The 2007 bust was a housing bubble.

This next bust will be the sovereign bond bubble.

Why does this matter?

Because of the dreaded “C word” COLLATERAL.

In 2008, the world got a taste of what happens when a major collateral shortage hits the derivatives market. In very simple terms, the mispricing of several trillion (if not more) dollars’ worth of illiquid securities suddenly became obvious to the financial system.

This induced a collateral shortfall in the Credit Default Swap market ($50-$60 trillion) as everyone went scrambling to raise capital or demanded new, higher quality collateral on trillions of trades that turned out to be garbage.

This is why US Treasuries posted such an enormous rally in the 2008 bust (US Treasuries are the highest grade collateral out there).

Please note that Treasuries actually spiked in OCTOBER-NOVEMBER 2008… well before stocks bottomed in March 2009.

The reason?

The scrambling for collateral, NOT the alleged “flight to safety trade” that CNBC proclaims.

WHAT DOES THIS HAVE TO DO WITH TODAY?

The senior most assets backstopping the $600 trillion derivatives market are SOVEREIGN BONDS: US Treasuries, Japanese Government Bonds, German Bunds.

By keeping interest rates near zero, and pumping over $10 trillion into the financial system since 2007, the world’s Central Banks have forced investors to misprice the most prized collateral backstopping the entire derivatives system: SOVEREIGN BONDS.

SO what happens when the current bond bubble bursts and we begin to see bonds falling and yields rising?

Another collateral scramble begins… this time with a significant portion of the interest rate derivative market (over 80% of the $600 TRILLION derivative market) blowing up.

At that point, rising yields is the last thing we need to worry about. The assets backstopping a $600 trillion market themselves will be falling in value… which means that the real crisis… the crisis to which 2008 was the warm up, will be upon us.

This is why Central Banks are so committed to keeping rates low. This is also why all Central Bank policy has largely benefitted the large financial institutions (the Too Big To Fails) at the expense of Main Street…

THE CENTRAL BANKS AREN’T TRYING TO GROW THE ECONOMY, THEY’RE TRYING TO PROP UP THE FINANCIAL INSTITUTIONS’ DERIVATIVE TRADES.

To return to our initial question (is this just a temporary top in stocks or THE top?), THE top is what we truly have to watch out for because it will indicated that:

1)   The Grand Monetary experiment of the last five years is ending.

2)   THE Crisis (the one to which 2008 was just a warm up) is beginning.

 

For a FREE Investment Report outlining how to prepare for another market crash, swing by: www.gainspainscapital.com

 

Best Regards

 

Phoenix Capital Research

When A Stock Bubble Goes Horribly Wrong And Hyperinflation Results | Zero Hedge

When A Stock Bubble Goes Horribly Wrong And Hyperinflation Results | Zero Hedge.

Perhaps the most amusing and curious aspect of this entertaining summary of the Mississippi Bubble of 1720, the resulting European debt crisis (the first of many), how bubble frenzies are as old as paper money, the man behind both – convicted murderer and millionaire gambler, John Law, what happens when paper money’s linkage to gold is broken, and how everyone loses their wealth and hyperinflation breaks out, is who the source is. The New York FedPerhaps the Fed-employed authors fail to grasp just what their institution does, or have a truly demonic sense of humor. In either case, the following “crisis chronicle” highlighting how banking worked then, how it works now, and how it will always “work”, is a must read by all.

Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis

Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver. At the time, Law’s Banque Generale was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa. Things didn’t turn out exactly as Law had hoped, and in this edition of Crisis Chronicleswe meet the South Sea’s lesser-known cousin, the Mississippi Bubble.

Who Wants to Be a Millionaire?

John Law was an interesting figure with a colorful past. He was convicted of murder in London but, with the help of friends, escaped to the continent, where he became a millionaire through his skill at gambling. Like South Sea Company Director John Blunt in England, Law believed that a trading company could be leveraged to exchange the monopoly rights of trade for the ability to make low-interest-rate loans to the government. And like Blunt, in 1719 Law formed a trading company—the Mississippi Company—to exploit trade in the Louisiana territory. But unlike Blunt or the South Sea Company, the Mississippi Company made an earnest effort to grow trade with the Louisiana territory.

In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.

Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.

By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. The word millionaire was first used, and in January 1720 Law was appointed Controller General.

The Trickle Becomes a Flood

Reminiscent of a handful of florists failing to reinvest in tulip bulbs as we described in a previous post on Tulip Mania, in early 1720 some depositors at Banque Generale began to exchange Mississippi Company shares for gold coin. In response, Law passed edicts in early 1720 to limit the use of coin. Around the same time, to help support the Mississippi Company share price, Law agreed to buy back Mississippi Company stock with banknotes at a premium to market price and, to his surprise, more shareholders than anticipated queued up to do so—a surprise we’ll see repeated at the apex of the Panic of 1907. To support the stock redemptions, Law needed to print more money and broke the link to gold, which quickly led to hyperinflation, as we saw in our post on the Kipper und Wipperzeit.

10-livre-banknote

The spillover to the economy was immediate and most notable in food prices. By May 21, Law was forced to deflate the value of banknotes and cut the stock price. As the public rushed to convert banknotes to coin, Law was forced to close Banque Generale for ten days, then limit the transaction size once the bank reopened. But the queues grew longer, the Mississippi Company stock price continued to fall, and food prices soared by as much as 60 percent.

To make matters worse, there was an outbreak of the plague in September 1720, which further restricted economic activity—in particular, trade with the rest of Europe. By the end of 1720, Law was dismissed as Controller General and he ultimately fled France.

Balancing Dispersed Debt Issuance against Central Monetary Policy

One might argue that Law suffered a self-inflicted loss of control over monetary policy once the link between paper money issuance and the underlying value of gold holdings was broken—a lesson that monetary authorities have learned over time. (ZH: they have? where?)  But what if you don’t have direct sovereign authority over banknote issuance or, in more modern times, monetary policy? A challenge that’s perhaps most visible in the Eurozone is how best to balance dispersed, country-specific debt issuance against more centralized authority over monetary policy. In an upcoming post on the Continental Currency Crisis, we’ll see why a united fiscal policy was needed along with the united currency and monetary policies. Could the same be true of Europe? And if so, would a united fiscal policy include Eurozone debt as well as centralized fiscal transfers, or perhaps even collection of taxes? Tell us what you think.

Average:Select ratingPoorOkayGoodGreatAwesome

Your rating: None Average: 4.7 (14 votes)

Subscriptions (0)

%d bloggers like this: