May 2016
Lessons From the Mississippi Bubble--Edward Chancellor
Whenever emerging markets felt a little too frothy this last decade we'd trot out a bit of Chancellor profundity:
"Emerging market speculation tends to appear at a juncture in the economic cycle when
declining yields on domestic bonds combine with an excess of capital to make
foreign investments particularly attractive."
-Edward Chancellor
Chapter 4, Fool's Gold: The Emerging Markets of the 1820's
And from The Market.ch, September 11:
Deutsche Version
Financial Historian Edward Chancellor has never observed more bubbles than over the past 12 years. With central banks underwriting financial markets, they are not even completely irrational. A comeback of inflation would burst them.
«In the years since the Lehman bust in 2008, we have been living through the most speculative era in the history of mankind», says economic historian Edward Chancellor, author of «Devil take the Hindmost», a book about the history of financial speculation. While financial markets are pushed higher by ever lower interest rates, the substance of paper wealth is getting wrecked, he cautions.«The very term bubble means that it must at some stage collapse», Chancellor says. «Either it collapses politically by creating a swing of the political pendulum against it», says Chancellor in an in-depth conversation via Zoom – «or it will be the comeback of inflation which will end the bubble.»While many experts doubt inflation is around the corner, Chancellor thinks we could be very close to a period with quite substantial inflation. «Central banks are expanding their base money, which is used for financing the deficits, and at the same time we have this interruption of global supply chains», he says. «If you maintain consumption while cutting supply, then that’s inflationary.»The problem for investors is that there is almost nowhere to hide. «I can’t think of constructing a portfolio that would protect you under all circumstances. I actually don’t think prudent investing is possible these days», he warns. He sees some appeal in value stocks, as they are short duration assets.Mr Chancellor, we often hear financial markets are in a bubble. Is that true?Almost immediately after the central bank response in 2008, we observed a resurgence of bubbles. Since then, there were more bubbles around than in every period we find data. It’s almost hard to think of an asset which hasn’t built a bubble at some stage over the last twelve years.How do you define a bubble?When I was at GMO, we would define a bubble quite simplistically as a two standard deviation move away from trend. After 2008, all commodities – virtually every commodity with the exception of coal – were more than two standard deviations above their trend. The same applied for housing and equity markets in various parts of the world. Of course, the commodity bubble burst shortly thereafter.What is driving these bubbles?We’re seeing a speculative super cycle which is a corollary of the debt super cycle in which debt is going higher and higher. This in turn pushes the collective financial and real wealth of the world higher and higher. In order to do so, interest rates have to sink lower and lower. Once you have more debt, you can only sustain it with lower rates as you want to keep the debt service ratio at the same level. One person’s debt is another person’s assets – so the debt is part of the general wealth bubble....
....MUCH MORE
Recently from The Market.ch:
August 10
Eugene Fama: "Inflation is Totally Out of The Control of Central Banks"
