It has been a decade since the collapse of Lehman Brothers, triggering a financial crisis unseen since the era of flappers, speakeasies, and Keepin’ Cool with Coolidge. The Great Recession came to an end in 2009, meaning that we are nine years into the current bull market, which is one of the longest in U.S. history. While the current economy appears to be on fire, another recession – or worse – is an inevitability, one that will be blamed on President Donald Trump, not his predecessor or successor.
Recently, the Oracle of Omaha, Warren Buffett, spoke with CNBC about the decade anniversary of the fall of Lehman Brothers. He also delved into a wide panoply of financial subjects, forecasting that a financial crisis is nigh. But he made one head scratching meditation that was rather interesting; everyone’s favorite billionaire averred that John Smith and Jane Doe cause bubbles to form, explaining:
“People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t. And their spouse is saying can’t you figure it out, too? It is so contagious. So that’s a permanent part of the system.”
It is difficult to argue with a billionaire who has made tens of thousands of people rich. That said, what he is describing is a symptom, not the cause, of the pecuniary disease. The real cause of the asset bubbles is the Federal Reserve, not your irksome next-door neighbor who acquires a new luxury vehicle every so often because he purchased FAANG stocks or Tesla shares a couple of years ago.
A Bubble in Everything
Right now, most markets are flourishing. It seems like the only sector of the economy that isn’t booming is the world of commodities, particularly of the metal variety. Everyone is getting rich, from the Wall Street executive to the busboy at your local family diner to your 95-year-old grandmother. And that is what’s concerning Buffett.
It is true that many markets are in a bubble, either one that continues to swell or one that is beginning to deflate. The most obvious one is the stock market as most equities are posting all-time highs. But once you begin to look beyond equities, you start to notice a dangerous trend: The fundamentals of most markets are not sound.
In 2008, Russian billionaire Dmitry Rybolovlev purchased Paul Gauguin’s “Te Faire La Maison” for $85 million. The fertilizer mogul put the artwork on the auction block in March 2017, but he only garnered $25 million, resulting in a 74% loss. Unfortunately for Rybolovlev, that wasn’t one-time incident. In the last few years, he had started to sell pieces of his $2 billion vintage art collection, enduring a $100 million loss – and counting.
And it isn’t just Rybolovlev who is witnessing his investments crumble. A couple of years ago, there was an immense correction in the international art market. In 2016, Christie’s auction house experienced a 17% sales drop to $5.4 billion. Ditto for Sotheby’s, which reported a 27% decline, falling to $4.9 billion.
Another booming market that is going through a correction stage? Vintage automobiles.
It seems that after years of double-digit growth, classic cars have hit the brakes as their price-tags are no longer going through the roof. For instance, the value of classic Jaguars and Porsches surged as much as 47% in 2013, but average prices rose a tepid 1% in 2016.
The U.S. real estate market is in a housing bubble 2.0. It has all the hallmarks of the 2006 housing crisis:
- Investors and speculators represented 35% of new home sales in 2016.
- Banks are gradually offering zero-down mortgages.
- Mortgage lenders are cutting down their credit standards.
- Homeowners – primarily of the millennial demographic – are tapping their equity.
- Foreclosures and delinquency rates are on the rise once again.
If you’re a perma-bear or a goldbug, then you’re probably hoping for a bubble in gold soon.
Blame the Fed
So, bubbles in vintage art, classic cars, and houses. Who’s to blame? It might seem easy to pass the buck onto your annoying neighbors, but the real culprit is the U.S. central bank.
Whenever a bubble forms, it is because the central bank has started to expand the money supply. A rapid increase in the growth trends of the money supply is then followed by a substantial jump in asset prices. This has been the norm since the end of the last recession. Then-Fed Chair Ben Bernanke turned on the printing presses and facilitated the flood of cash into a plethora of asset classes without any savings. His successor, Janet Yellen, wasn’t any better, creating $3 trillion in new money in a four-year span.
The bubble pops when money growth slows, and the bubble cannot be sustained with present levels. The M2 money supply data suggests the Eccles Building is still running the printing presses, though it has slumped over the last two months.
That said, it can be difficult to ascertain when the next bubble will pop and the good times will turn into bad times. What we do know is that the bull market still has some legs in it without a significant slowdown in sight.
Despite what Buffett contends, asset bubbles are not formed by the jealousy of your obnoxious neighbor’s success. They are developed through the Fed’s money-printing schemes.
No wonder why President Donald Trump demands Powell to print money and keep interest rates low.
It’s Different This Time
What is another sign you’re living in a market bubble? When the smartest men on television keep trying to convince viewers that it’s different this time.
This was the go-to line throughout the dot-com bubble, the housing bubble, and today’s equities bubble. The truth is is that it’s not different this time; the Fed enables the booms and busts with its interventions and manipulations, making it the most powerful and most dangerous institution in the nation, and perhaps the world, today.
But you can’t fault Warren Buffett for casting blame on average folk because, let’s face it, he is one of the first people at the Fed’s monetary spigot.
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