Saturday, September 18, 2021

The Mother Of All Bubbles - Are We In For An Unprecedented Crash? (Part IV)

….continued from previous posts…

Part IV - It’s Only Money

Some years ago a gentleman I worked with at an investment bank had a saying: “It’s only money”. John K. was at least 20 years my senior, having started his career in the early 1960s. At the time, I thought he was merely being sentimental, as in “money can’t buy you love”.  It took me a while to realize that John was being literal and was referring to markets.

Market prices are marginal, ie they are determined by incremental, instead of total, supply/demand and, since they float on a sea of money they rise and fall along with its ebb and flow. John was right: it’s only money. Emphasis on only.

It’s even more so with stocks, since unlike, say, wheat, they have no tangible underlying physical demand and are therefore priced at multiples of other markers like earnings, sales, assets, etc. You can’t eat stocks or, these days, use them as wallpaper; furthermore, their prices are derived from a consensus view of the future, since just about everyone ignores the past. 

Therefore, tongue in cheek, how are stocks any different from Papal indulgences? After all, you pay a given price for a stock today because you believe it to be a fair representation of the future. We call it a discount mechanism, but it is merely one more article of faith in the Permagrowth religion. The more you believe, the more you pay. 

But, wait a minute… what about “it’s only money”? Show me the money, cries the unbeliever - so voila: the connection between money/more money/much more money and share prices is obvious, as you can see in the charts of M3 and S&P 500.

Lest we forget, I’ll end today’s post with a reminder: money is debt. More money is more debt. Much more money is much more debt. 

Why the reminder? Two reasons:
  1. Some will argue that more money/debt is a natural consequence of higher GDP and therefore there is nothing to worry about. False: Debt/GDP is now the highest in US history. Today it takes four times more debt dollars to produce a dollar of GDP than it did in 1980. Debt to GDP has soared from 30% to 125%.
  2. Bubbles initially thrive on debt (leverage) but are eventually poisoned by an overdose of it.The bigger the leverage, the bigger the crash once the bubble is popped. Unprecedented debt therefore will, by default (pun intended), result in an unprecedented crash.
And there you have it…. I may write one more post in this series to include the other elements mentioned in the second post, not sure yet.



  1. Pure, direct and easy to understand logic. Great series Hells! I guess those at the helm simply see the US markets and economy as the only game in town. A TINA (there is no alternative) effect. They're convinced nobody will sell the US in order to buy, what? Europe? Latin America? China (with its current regulatory clampdown)? So they decided to go all-in pumping money and Covid is the perfect cover for it? Maybe it won't crash but merely go sideways, range-bound, for a decade or more?

    1. You are right camabron, there is a large element of TINA involved today. Not so much a geographic one (US vs what else?) as an asset class one. That is, with interest rates so low and cash pouring in daily, it’s stocks vs. what? But that obviously is a spurious argument leading to a bubble, since it completely ignores fundamentals.

      My own main projection calls for a sharp correction pretty soon, a rebound of some sort and then a long-lasting seminal bear market. I give this around a 60% chance. I give 20% chance for a big crash and 20% for big new highs.

      Markets just don’t go sideways for too long, in my experience.

    2. I really like the TINA idea.... China's property market is a great example of TINA... the people can't really invest in anything but property.... curious to see how that ends...

  2. ...but during the whole 70s decade US markets did remain range-bound and sideways Hells... a wide range yes, from 70 to 120 S&P500 points, but sideways for a little over a decade...

  3. *70 to 120 S&P500 in value. Or DJI between 650 and 1,000 in value.

  4. Wow! The Porsche 928 from the movie Risky Business sold for a whopping $1,980,000 US! While other examples are to be had for $20,000 US. People with money are willing to pay whatever for exclusivity. An obvious dollar debasement red flag, no?

  5. **Although yes Hells, a 50, or 350 point range on indexes worth 120 and 1,000 respectively is akin to a crash, then range-bound scenario with 41% and 35% drops respectively. That would place the current S&P500 back at the 2,800 level. And the DJI at the 21,600 level.

  6. Btw Guys,

    Remember, that when we read the bible, it attributes all disasters to loss of faith in god... The strange thing is that the decline of Western civilization also seems very closely tied to the decline of the Church. The same with the decline of Rome with the decline of old Roman religions....

    I am not using this as an argument for God (correlation is not causation) but the correlation is very good... I am wondering if there is some undiscovered root here...

    1. Interesting point. The Flood, the Tower of Babel, the parable of the prodigal son… they all point out what happens when humans believe more in their own power than that of God.

      Today’s religion is Permagrowth, its high priest is the central bank and the acolytes pray to the painted idols of markets.

      The real, spiritual Church, whichever it may be, has been relegated to second fiddle.

    2. The fool hath said in his heart,
      There is no God.