The GREAT CURRENCY BUBBLE is ENDING (part 2): How/When Bubbles actually burst

in #money6 years ago

Something bad needed to happen to spark the beginning of the end for worldwide currencies, and it did. We will get to that in a moment.

Every great bubble has a cause and an effect. The cause of the 1929 bubble stock market, was the increase in credit allowed by market participants. You probably know this as "margin". Borrowing stock margin is by most standards a very small amount of borrowing, or "leverage". Typically a broker will let you borrow about 2:1 when times are tight, so you could deposit $10,000 and be given the authority to invest $20,000. But when it becomes EASY to make money, that margin increase can go from 2:1 to 10:1 such that $10,000 can be used to invest $100,000 in stock. A 10% gain in a 10:1 portfolio equals doubling your money, and a 10% loss means you lose 100% of your investment. But margin doesn't affect the overall stock market, until EVERYONE is abusing it. By 1929, everyone was not only abusing it, but there was literally no one else left able to increase their borrowing bc all the capital was deployed that was going to get deployed. Quite simply, there was no more buyers left which could make prices continue upwards. Supply of stock shares, responds quickly via two methods to a buyer's frenzy:

  1. The share prices go up, thus it takes more money to buy 100 shares of a $100 stock than a $10 stock.
  2. Businessmen tap that frenzy, and sell shares in their companies to wildly speculative markets.

This is exactly what happened. While most history books will try to tell you an underlying bad economy is why the market turned sour, it's actually the OPPOSITE. A GREAT economy is the underlying reason a market goes sour, bc it allows speculative investment on the basis of "fundamentals" to push stock prices up, which then pushes up growth expectations even higher. You see, the stock market doesn't go down bc businesses everywhere start losing money, it goes down bc businesses everywhere can't grow FAST ENOUGH to justify the long-term expectation pressure investors have put on them via high valuations. Furthermore, the bubble itself is CREATING wealth, in that price increases for goods lags demand, and since that demand stems from confidence to spend by those making gains on the stock market, it's self-reinforcing and creates the bubble effect. Bubbles pop not because a pin comes along, but because there isn't enough bubble gum to keep the walls of the bubble secure. Bubbles pop bc the larger the bubble, the more "capital" is required to make it grow the same amount NEXT year. There isn't some boogeymen who suddenly decide to sell all their shares, and this sparks a panic. (this does happen, but only AFTER markets have begun going down). The "boogeyman" is simply that stocks can't seem to go any higher, bc there's no capital or borrowing or credit left to add to the valuations to allow them to go higher. In poker, this is called "ALL IN". The pot COULD go higher bc both parties wish to bet more on their sure-things, but the pot cannot go higher bc the players don't have any more chips to throw in and they've already thrown-in the deeds to their horse and carriage (which they own on credit from the bank) on top of the chips. At some point, one of the gambler's says "when". Did they suddenly think their 4 aces were beat? No. They didn't haven anything left to bet. This is EXACTLY how bubbles burst. The down cards are good, confidence is high, everything's been going according to plan. Win or lose, there's no getting higher than that moment; the winner can only win what's on the table, and the loser will lose everything and then some. What happens after an "ALL IN" is somebody bet with money they didn't have, the BANK became party to the gambling and didn't know it. The winner is supposed to get the car, but he doesn't know that the loser didn't fully OWN the car, only the equity he put into it. So now the bank and the winner of the hand are arguing, lawyers enter the fray, counterparties both, thus counterparty risk. If the pot was $100 trillion dollars, the lawyers are going to eventually uncover the truth: There's only a few ACTUAL trillion of underlying assets beneath that $100 trillion in credit. Somebody is going home with less than they thought, and will need to make spending adjustments to make up for the difference.

"Honey, I shrunk the bank account, we have to cancel the cable bill and maybe sell the Humm-V and purchase a reasonable car."

But the bubble begins going down WELL before these fundamentally awful decisions are made. The bubble bursts WELL before the lawyers decide there's less money in the pot than was thought. The bubble stops expanding due to sheer lack of funds to put into the middle. The bubble stops going up DURING the poker game (the fun, or economic good times). You see, this is where the misconception lies. People who sell their stocks bc something bad happens, end up losers. You sell your assets when the GOOD thing happens which you were expecting. Sell the News.

Now that we've talked generally about the basics of bubbles so they are easier to understand, in the next installment we will continue our short history of how the Great Real Estate & Banking Bubble (now known temporarily as "The Great Recession") ended. We left off with the failure of New Century Financial, but that failure didn't end the party, that was just the goofy guy with the lampshade on his head finally falling over and having a broken beer bottle puncture his sphinkter-- carted away on a gurney. The music was turned down briefly while they carted him away, but everyone just thought THEY weren't as drunk as THAT guy.

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It sure does feel like we are nearing the end of the sidewalk. And yet, it could go still higher before a big fall.

I didn't realize that a lot of people are now financing cars with a 72-month loan instead of the 60 months I recall from 10 years ago.

There comes a point when the credit cannot expand further without the house collapsing.

Do you think a collapse hurts or helps crypto?

I tend to think the nearly all cryptocurrencies fall 90%+ as people cash out to pay for real-life costs like bills, mortgages ...

You are correct, credit always creates the bubbles, and bubbles always build on the place to get the next highest amount of credit. Stocks is typically 2:1 leverage (and sometimes as high as 10:1), and RE is 5:1 for starters and in years like 2006 can rise to "no doc" 20:1 and banking can rise to 40:1 easily (see the European banks). Currencies is the place to get infinite credit tho, it's a printing press-- electronic for speed.

Crypto's worst nightmare would be if it was adopted as a currency of commerce while the US Dollar still existed in it's strong form. Then you'd have HODLers inspired to use their crypto savings to purchase, and what would the retailers do? They'd be forced to sell the crypto and get fiat for them, if for no other reason than to report their gains to their shareholders and accountants in constant-currency form.

To answer your question, crypto IS the bubble, just it's subprime form. The craziest form of the bubbled commodity drops first, then the ones which are thought to be the strongest (Intel, Microsoft, JPMorgan, Goldman Sachs, Morgan Stanley, Bunk of America, ShitiGroup, the Japanese Yen, the Chinese Yuan, The US Dollar) fall last.

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