The Fed has been blowing bubbles since Greenspan entered the fray in the late 80’s and the last decade has seen the rest of the world join the fire hose of liquidity brigade. The process of solving crises created by cheap money with even cheaper money became too seductive for the globe’s financial policymakers. The increased domestic activity was complimented by a falling currency and of the export base.

BUBBLE SEQUENCE
The 1st bubble came in the form of the dotcom phenomena hyper inflated by the Y2K fear and need to have the newest equipment at century turn. I was thinking a 1929 type event would unfold with telecom/tech replacing railroads/radio. The economy did experience a relatively mild recession, but the extreme bursting was contained mostly to nose bleed priced internet companies (remember Pets.com?) and day traders.

Bespectacled Al’s solutions to that hiccup were obtuse diatribes with Congress and reducing interest rates extensively creating the lowest mortgage costs in decades. Policymakers (Bush, Dodd, & Frank especially) thought this was a good time to expand home ownership to include all mirror foggers. The risk in these liar loans was obscured by securitization and hip pocket ratings agencies. This financial crisis was real and monumental culminating in Prez Bush and Treasury Sec’y Hank Paulson showing up ashen grey in the Rose Garden. There they laid out the “Too Big To Fail” rationalization allowing Wall Street to socialize all their losses. Rewarding greed at its worst.

I thought for sure this debacle would lead to a 30’s type economic challenge? Then cheap money turned into free money. Stocks bottomed in months, this time Ben Bernanke manning the Fed fire hose. Quantitative Easing was implemented and it worked so well Europe and Asia decided to grab hoses. The asset inflation wealth effect strategy gained robust traction. Combined with the emergence of productivity expanding FANG type companies the economy lifted and more importantly fueled a decade long Bull Market for all asset classes. Everyone’s 401k and home leapt to new highs and those with the most assets gained the biggest benefit. This is what took the income gap to an all time spread.

NEXT BURSTING BUBBLE?

With the enormity of global debt the next downturn will hamstring the ability to service that debt. Investment in typical capital expenditures will be replaced by interest payments. We are probably on the cusp of another bankruptcy boom? Remember the larger, wider 2007 inflatable fell swifter and steeper than the 2000 edition. Even if we avoid a crisis we are staring at an extended period of malaise that will magnify these current pricey issues. 

  1. Ever expanding income gap – no middle class, no growth
  2. Underfunded pensions
  3. Bloated entitlements
  4. Ill prepared retirees due to 2 & 3
  5. Lack of jobs for new wave of immigrants
  6. Homelessness & increasing mental illness

I worry about the next generation and their ability to lead us out of the issues our generation created. Think about it we created this massive financial problem and foisted upon the generation we mentored ineffectively. Tough for leadership to evolve from your parents basement watching Netflix or playing video games. Am I wrong?

If the correction/recession occurs within the next year it could hamper Trump’s reelection bid. His emphasis on the stock market as his chief measuring stick could become a HUUUUJ-A mistake. Not a stretch to imagine some Dems with TDS rooting for the recession?

CURRENT MARKET

No change in what I see from last week, (be sure to read this) all those charts are still in play. Here is a chart (can’t go without at least one) that supports the coming correction. Utilities are one of the major defensive sectors in the market with their regulatory driven high dividends. They are at a pivot point ready to break to all time highs (bearish for broader market) probably propelled by the smart money? Like in poker if you don’t know who the smart money is….

I realize this has not been a ray of sunshine and longer than normal, only because I fear we are near an inflection point. The monthly charts are the most vulnerable I have seen in my career. A key question is can Trump and his crew circumvent their ominous message?  Like I said last week “Here’s to dry powder!”

Final Thought
This would be a great world to dance in if we didn’t have to pay the fiddler”

                                                                                                        – Will Rogers 1930

More later,
Max Power

Join our list

Subscribe to our free newsletter and get exclusive content delivered to your inbox. Knowledge is power!

Thank you for subscribing!

Something went wrong.