The Great Asset Bubble (?) -- John Rekenthaler

davfor

What to do when the marketplace acts like the central bank will always have its back...The author winds up in a somewhat similar place to the one in which I currently find myself. Except, it currently appears to me there will be no fundamental change of course by the central banks unless the bottom falls out and they are incapable of engineering another rescue.

In 32 years, I have never believed a word about U.S. government officials creating an “asset bubble.”....This column is not to second-guess emergency decisions (by central bankers). It is instead to confront the prospect that for the first time during my investment experience, the wolf of asset-price inflation has arrived. At some point, if enough liquidity is created through central-bank actions and deficit spending, those funds will push asset prices higher than they otherwise would be. That time would seem to be now.

Which leaves me with little advice to offer, this being new territory. One obvious concern is portfolio diversification. If rapid money creation can cause all assets to rise at once, then presumably the opposite policy might lead all assets to fall at the same time. That would be disheartening. It would also seem to be an implicit recommendation to hold more cash, and thus fewer risky assets.

https://morningstar.com/articles/998348/the-great-asset-bubble

expatsp

Very interesting, thank you for posting.

Rbrt

Yes, interesting. I think he’s mistaken however. The government has caused asset inflation to mitigate the aftershocks of popping bubbles in the past. That was true after the housing bust in 2007-2009. Maybe in 2000 the Fed gave the internet bubble one last blow as it pumped money to try to head off any Y2K disruptions.

A couple of takeaways:
“ It may be that once again, the global economy will prove more resilient than expected. It may be that everything can simultaneously rally, based solely on rational future expectations - That, however, would not be the way to bet.

At some point, if enough liquidity is created through central-bank actions and deficit spending, those funds will push asset prices higher than they otherwise would be. That time would seem to be now.”

Sven

If there is no free lunch, what are the consequences of inflated asset?

WABAC

Most interesting thing he has written in a long while.

wxman123

But cash will fall in value too. Gold or hard assets, maybe?

davfor

Sven said:

If there is no free lunch, what are the consequences of inflated asset?

The bill will come due at some unknown point in the future.....

WABAC

wxman123 said:

But cash will fall in value too. Gold or hard assets, maybe?

Maybe in comparison to a loaf of bread. Maybe not in comparison to stocks or bonds.

Seems to me the force the central banks have been fighting is deflation. Maybe we will finally get that inflationary spiral everyone has been worried about.

davfor

Inflation seems like a plausible outcome. Loose fiscal policy (MMT in action over time in many developed countries) combined with central bank largess may well eventually cause the inflation rate to increase substantially in a sustained manner.

WABAC

davfor said:

Inflation seems like a plausible outcome. Loose fiscal policy (MMT in action over time in many developed countries) combined with central bank largess may well eventually cause the inflation rate to increase substantially in a sustained manner.

Yes. It seems plausible. And it has been the stated goal of the Fed to get the inflation rate to a certain point for some time now.

Grocery prices have gone up for those items that have suffered the most from supply chain disruptions. But everything else is still reasonable.

Inflation has been described as too much money chasing too few goods. Most Americans don't have too much money. And they can buy a plethora of cheap things that satisfy most of their basic needs at Walmart and Amazon.

And where is all the Fed money going? Into buying assets of companies that mostly aren't making investments in research, employees, or actually making something useful.

I think Rekenthaler is on to something.

Rbrt

Does this meld with Steven Roach’s ideas that the dollar is set to fall 30%?
https://www.mutualfundobserver.com/discuss/discussion/comment/128590/#Comment_128590

Here’s another version of Roach’s views on the dollar.
https://www.project-syndicate.org/commentary/european-rescue-fund-weakens-dollar-hegemony-by-stephen-s-roach-2020-07#comments

“ An overvalued US dollar is ripe for a sharp decline, owing to America’s rapidly worsening macroeconomic imbalances and a government that is abdicating all semblance of global – or even domestic – leadership. And the European Union's approval of a joint rescue fund is likely to accelerate the euro's rise.”

“ My prediction of a 35% drop in the broad dollar index is premised on the belief that this is just the beginning of a long-overdue realignment between the world’s two major currencies.”

“ Whereas the International Monetary Fund expects the US current-account deficit to hit 2.6% of GDP in 2020, the EU is expected to run a current-account surplus of 2.7% of GDP – a differential of 5.3 percentage points. ”

Note - also check out the comment..Quite a few make the case that the EU euro will not be the new reserve Currency.

Anna

Yep, a 35% tax that falls predominately on the middle and lower class is exactly the solution as long as there is an echo of giant daily landmark highs in the casino.

Old_Joe

These abridged excerpts are from an article in last week's The Economist.

A reserve-currency issuer should play an outsize role in global trade, which encourages partners to draw up contracts in its currency. A historical role as a global creditor helps to expand use of the currency and encourage its accumulation in reserves. A history of monetary stability matters, too, as do deep and open financial markets. America exhibits these attributes less than it used to. Its share of global output and trade has fallen, and today China is the world’s leading exporter. America long ago ceased to be a net creditor to the rest of the world—its net international investment position is deeply negative. Soaring public debt and dysfunctional government sow doubt in corners of the financial world that the dollar is a smart long-run bet.

Challengers have for decades failed to knock the greenback from its perch. Part of the explanation is surely that America is not as weak relative to its rivals as often assumed. American politics are dysfunctional, but an often-fractious euro area and authoritarian China inspire still less confidence. The euro’s members and China are saddled with their own debt problems and potential crisis points. The euro has faced several existential crises in its short life, and China’s financial system is far more closed and opaque than the rich-world norm.

The global role of the dollar does not depend on America’s export prowess and creditworthiness alone, but is bound up in the geopolitical order it has built. Its greatest threat is not the appeal of the euro or yuan, but America’s flagging commitment to the alliances and institutions that fostered peace and globalization for more than 70 years. Though still unlikely, a collapse in this order looks ever less far-fetched. Even before the pandemic, President Donald Trump’s economic nationalism had undercut openness and alienated allies. Covid-19 has further strained global co-operation. The IMF thinks world trade could fall by 12% this year.

Though America’s economic role in the world has diminished a little, it is still exceptional. An American-led reconstruction of global trade could secure the dollar’s dominance for years to come. A more fractious and hostile world, instead, could spell the end of the dollar’s privileged position—and of much else besides.

(Italic text emphasis added.)