Bubbleology – The Science of Bubble Money

 

On the 12th November 2014 – some 10 years after it was launched – lander module Philae which accompanied the Rosetta spacecraft touched down on Comet 67P/Churyumov-Gerasimenko (67P) to begin extra-terrestrial scientific observations. The on-board telemetry communicated back to Earth some 28 light-minutes away revealed that the lander had bounced twice off the surface of 67P. The first bounce may have lasted two hours and over 1 kilometre and is considered the largest space bounce in history which we would put it on a par with the incredible bounces in the US and Japanese stock markets this past month!


Back here on Earth Japanese monetary policy has similarly taken a giant leap forward for mankind by conducting its own scientific experiment. On the 31st October 2014 Bank of Japan Governor Kuroda-san implemented an addition to his ‘Qualitative & Quantitative Easing’ (QQE) policy begun a year ago. The surprise event was less the timing and magnitude but the clear brazen coordination of monetary and fiscal policy using the conduit of the Japanese Government Pension Fund to implement it. The QQE drove stock markets into a frenzied rally.

 

Central banks have been conducting a seemingly coordinated financial program of unconventional monetary policy – assuringly scientific in its nomenclature of QE and QQE – media commentators marvel at the boldness (stupidity) of policymakers ‘to go forth where no man has gone before’ and eradicate the spectre of debt deflation.

 

Policymakers have been studying and implementing ‘Bubbleology’ – the science of bubble money. The impact of this earthly science on both economies and financial markets has been truly dismal. It is clear it is creating a divergence between economic and financial reality.

 

Far from eradicating the perils of debt deflation it is clear this program has merely initiated more fiscal and private sector balance sheet irresponsibility, as both continue to lever up. The capital (‘near money’) allocation of such leverage has resulted in rising asset classes, primarily housing stock, equity and bonds where the pursuit of yield has ignored all credit risk sensibilities. All this has occurred at the expense of daily living standards and the misdirection of capital.

 

We are witnessing the continuation and completion of the financialization of our economies and markets which began at the instigation of governments and central bankers in the years leading up to the 2008 crisis. There is no attempt to foster sustainable capital and income through innovation and production which ultimately drives healthy employment.

Rather financialization of asset classes driving elevated prices which creates an inequality of wealth, albeit illusionary wealth. Land, housing stock and excessive equity price growth in reality drains productivity away from entrepreneurship and the employment which enables sustainable taxable income for nations to run prudent fiscal surpluses.

 

We are in the butterfly vortex of a momentary illusion of ‘hyperinflated’ wealth – for the value of money is sinking rapidly – destroying the purchasing power of the global majority. Markets have a memory and from the first moment central banks expanded their balance sheets the flap of Lorenz’s wing has cast a shadow over financial and economic stability.

 

I offer a stark warning. This next week could well prove to be a historic turning point in the efficacy of money printing. The market herd has fully committed itself to the ‘Weimarization’ of equity. ‘Weimarization’ is the phrase I coined to refer to the rapid rise in equity markets as a consequence of monetary reflation. I first documented the potential of rapidly rising US and Japanese equity markets in our HindeSight Letter Nessun Dorma – None Shall Sleep in January 2011.  And how markets have rallied but I firmly believe despite the inherent danger of fighting trending, debasing equity markets, now is the time to realize that the risk of a cascade lower in stock markets is very high. We are reaching a point of criticality.

 

When the herd is committed and the ‘money bubble’ potion  has been fully drunk for now, it is time to be contrarian. This past few weeks Japan, China and the ECB have infused the markets with another dose of their elixir and the Pavlovian response of investors ensures the pack is likely fully invested.

 

This recent melt up in the US stock market is a SELL.

 

And conversely it is time to BUY precious metals.

 

Also, for the first time I truly recommend BUYING gold mining companies, which we have had almost zero allocation to since 2012. This is our first buy recommendation since we recommended selling them in 2012.

 

In our HindeSight Investor Letter – Bubbleology – The Science of Money, I endeavour to highlight where the echoes of monetary history are manifesting themselves in systemic risk across the globe. Click Here

 

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