Friday, January 19, 2018

Almost Everything Bubble

The purity of bitcoin harkens back to the stock market of a hundred years ago, when the gold standard limited money supply growth, with the resulting boom and bust cycles.  Now that nearly everything is denominated in US dollars, the busts just don't last long, because of Fed policy. 

Ever since the Greenspan put days of implicitly supporting the stock market with monetary policy, bubbles are nurtured and eventually get too big and unwieldly and collapse not because of a tightening Fed, but from its own weight and irrationality.  Two classic examples are the dotcom bubble(1998-2000) and the housing bubble (2004-2007). 

Some people say this is the everything bubble, but its really 3 things:  stocks, real estate, and bitcoin, and they vary by country.  In the US, its a stock market bubble.  In Asia, Australia, Canada, and Northern Europe, its a real estate bubble.  And among the younger speculators, its the bitcoin bubble.  I see no bubble in bonds, because it is just being priced off of short term interest rates, and a term premium that ebbs and flows with short/medium term supply-demand.  I also see no bubble in commodities, which are well below the peak levels of a few years ago. 

The stock and real estate bubbles are linked because the most speculative real estate markets in the world, such as China, Australia, Canada, etc, mostly depend on a strong housing market for economic growth.  With rising private debt reaching levels that previously resulted in recessions in the past, you are seeing declining housing sales in those countries, usually a precursor to a price drop.  Historically, housing sales volume drops precede house price declines by about 12-15 months.  If housing prices dropped sharply, those real estate bubble countries' economies would go into recession, which would have contagion effects to economies that heavily depend on exports to those countries. 

So the most likely trigger for the next global recession is the real estate bubble popping in a few overheated countries.  2016 is just a precursor to a bigger downturn in China.  Now that the Party Congress is over, there will be less incentive for the Chinese leaders to keep kicking the can down the road.  Even if they did kick the can again, unless its a massive stimulus, the sheer amount of debt outstanding makes its economic effects minimal, as much of the new debt will be used to payback the old debt.  It just builds a bigger pyramid.  It is a centrally planned Ponzi scheme, with real estate speculation at its core, with insane amounts of yuan needed to be printed to keep Humpty Dumpty together.  And capital outflows shut off to keep the semblance of a stable currency, when in reality, the moment it becomes free floating, it would drop at least 50%. 

The past few days, I have noticed that the intraday volatility has picked up, and the indices seem more jumpy than usual.  It seems like we've finally gotten to levels where you are seeing more air pockets and weaker bids.  It feels like a market that is near a short term top, with short sellers mostly cleared out.  I am close to adding to my short, but will likely wait till Monday because retail seems to be jumping on board, with mutual fund Monday coming up, as inflows are coming in hot and heavy recently.  The put/call ratios have been absurdly low for weeks on end, so there is very little protection out there, and even less with post opex coming up next week.  A big one day drop seems to be just around the corner.


jryan said...

Are you adding to your short here ?

Market Owl said...

I will be adding to the short this week. But this will be a defensive addition, looking to trade around my position to increase my short avg price and also trim on a short term move lower.