Thursday, June 6, 2019

The why of asset inflation.

Today, we are witnessing a broader asset price inflation driven by a belief that central banks will engage in extraordinary monetary policy indefinitely to prop up valuations in the hope for the always “just around the corner” wealth effect. Equity markets are near all-time highs and at extreme valuations despite weak economic growth and limited earnings growth. Bond yields are near the lowest levels (highest prices) human civilization has ever seen. Commercial real estate is back at 2007 bubble valuations and real assets such as art, wine, and jewelry are enjoying record-setting bidding at auction houses.

These financial bubbles could not occur in an environment of weak domestic and global economic growth without the migration of debt borrowers from hedge [paying principal and interest from cash flow] to speculative [paying interest from cash flow and rolling over the debt to avoid the penalty of failure to pay the principal] to Ponzi status [inability to pay interest and principal but hoping that the value of one's investment will continue to rise enough to pay off the loan].[1]

I don't pretend to have much beyond a surface understanding of economics. Bonds are a bit mysterious to me, for example. I get it that the yield of a bond will rise if an investor pays less than the face value of the bond and decline if he pays more than the face value. Presumably, I will pay less for a 3% bond if I think there is a smidgen of risk that the issuer won't pay at maturity and I will pay more for a bond if I think it offers more security in an environment when other risk-on investments seem shaky. These purchases take place at auctions, I'm thinking. where investors basically place their bets, just as they do in the stock market.

That little detour aside, the author of the article from which the passage above is taken is making the point that relying on the central banks to kiss it better is not wise when we have "weak economic growth and limited earnings growth." Or ever, come to that.

This is right up there, but not quite, with Illinois Gov. Pritzker's idea that Chicago's fiscal problems can solved by legalizing marijuana state-wide and opening a casino in Chicago. I kid you not. I consider weed something indulged in by total losers and do not consider gambling anything that is wise or productive (though I do play the lottery). God knows where the money from gambling goes. And neither of these options has anything to do with fundamentally valuable production.

But there we have it. Central banks, weed, and gambling are our go-to solutions for deadly serious problems. Not military retrenchment and keeping out and kicking out parasitic foreigners who steal our jobs and live high on our tax money. Nothing sensible and gutsy like that but rather demeaning reliance on airy-fairy-hail-Mary gimmicks.

'Chachos, we are a failing nation.

Notes
[1] "The Death Of The Virtuous Cycle." By Michael Lebowitz, ZeroHedge, 6/6/19.

1 comment:

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