How Debt-Asset Bubbles Implode: The Supernova Model of Financial Collapse

http://charleshughsmith.blogspot.com/2017/05/how-debt-asset-bubbles-implode.html

500 Years Of Stock Panics, Bubbles, Manias, & Meltdowns (In 1 Simple Chart)

http://www.zerohedge.com/news/2016-07-31/500-years-stock-panics-bubbles-manias-meltdowns-1-simple-chart

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The Cruel Injustice of the Fed's Bubbles in Housing

http://charleshughsmith.blogspot.com/2014/11/the-cruel-injustice-of-feds-bubbles-in.html

Federal Reserve chair Janet Yellen recently treated the nation to an astonishing lecture on the solution to rising wealth inequality--according to Yellen, low-income households should save capital and buy assets such as stocks and housing.

It's difficult to know which is more insulting: her oily sanctimony or her callous disregard for facts. What Yellen and the rest of the Fed Mafia have done is inflate bubbles in credit and assets that have made housing unaffordable to all but the wealthiest households.

Fed policy has been especially destructive to young households: not only is it difficult to save capital when your income is declining in real terms, housing has soared out of reach as the direct consequence of Fed policies.

Janet Yellen’s Bathtub Economics: Excuse Me Doctor—There’s Bubbles In That Tub!

http://davidstockmanscontracorner.com/janet-yellens-bathtub-economics-excuse-me-doctor-theres-bubbles-in-that-tub/

Gold Reaches New Record High - News Barely Reported by Mainstream Media

http://www.goldcore.com/goldcore_blog/gold-reaches-new-record-high-news-barely-reported-mainstream-media

Gold’s all time record nominal high yesterday was barely reported in most of the mainstream business and financial press today - slightly more online but there was little or no coverage in print. 

This is an indication that gold and silver remain far from the “bubbles” that some have suggested. Speculative manias and bubbles are characterised by mass participation and widespread enthusiasm and “irrational exuberance” by all sectors of society including the media and particularly the retail investor and the “man in the street”.

 As seen today, this is clearly not the case at the moment as there continues to be little or no reporting (let alone analysis) about gold and silver – even when they reach record nominal highs. 

While the specialist financial press such as Bloomberg, Reuters. Dow Jones, the Wall Street Journal and the Financial Times did report the record highs; it was unreported in the mainstream press in most western countries.

The media’s continuing non-coverage of gold and silver is a clear indication of the lack of animal spirits in the sector. It is proof, if any were needed, that the mainstream media and the man on the street remains far from bullish on gold and silver.

Indeed, recent years and recent months have seen many so called “experts” warning about the dangers of the gold “bubble”. They have been proven badly wrong and it would be interesting to read a story about how wrong they got it.

The majority of investors and savers in the western world do not know what gold bullion is and could not tell you the price of an ounce of gold or silver in dollars – let alone in pounds, euros or other local currencies.

The majority are unaware of the huge developments in the gold markets (only reported by specialist financial press) such as China’s emergence as one of the largest buyers of gold in the world (see news and our video below) and the fact that central banks and astute hedge funds are some of the largest buyers of gold in the world today.

A bubble only takes place when entire societies , including many - if not the majority - of journalists and media become convinced that you “cannot go wrong” with a certain speculation or investment and it is a risk free way of making returns.

This leads to gushing reportage and commentary about the “sure thing” that is a certain stock, bond, commodity or property market. It is characterised by widespread commentary and a belief not just in the financial press but in the mainstream media (day time radio and television etc) that one must speculate or “invest” by buying a certain security or asset class – whether that be tulip bulbs, Nasdaq, Apple or property in London.

Greed and buying motivated to make a profit or quick buck becomes widespread. This has not happened in the bullion markets as the majority of bullion buying has been safe haven buying for wealth preservation purposes rather than accumulation.

Concerns about a bubble in gold may be justified when it reaches its inflation adjusted high of $2,300/oz. Similarly with silver, concerns about a bubble may be justified when it reaches its inflation adjusted high of $130/oz.

Concerns about a bubble in gold will be justified when gold is covered in a regular manner in not just the specialist press but also in the mainstream. When vested interests selling gold regularly appear in mainstream media advising people to but all their money into gold because it is a sure thing, it will be time to become very cautious about the sector.

Near the top of the gold market (when the price is likely trading at thousands of dollars, euros and pounds per ounce) we are likely to see front pages in the business press (such as Fortune, Business Week etc) devoted to gold and snappy front page positive headlines about how “Gold is King”, “Why Gold is a Must” etc.

When that happens it will be time to be wary of the gold bubble and reduce allocations to gold and silver.

The lackluster, negligent media coverage of gold’s record highs yesterday suggests that we are a long way from there yet.

US Treasury bills

In his December letter to investors, Bill Gross, manager of the PIMCO, the world's largest bond fund, laments his cash's 0.01% yield. Gross says at that rate of return, it would take 6,932 years to double his money.

Take into account the ravages of inflation (and taxes) over time, and the rate of return is negative. It's equivalent to giving the US government money, so they can hold it for you. To make matters worse, that US government is also bankrupt.

The only consolation is the holding period for Treasury bills is 3 months. But to tie up your money for 30 years, only to have it yield 4.3%, is insane to me. But that's exactly what buyers of 30-year US Treasury bonds were doing several months ago. Inflation alone wipes out bond investors. Even with a weakening economy, if demand for long-dated US bonds remain tepid, yields have to increase to attract demand. We saw that last week.

A weak economy results in low bond yields, but any uptick in economic activity would cause yields and interest rates to rise, causing bond prices to decline. That's the bubble I'm expecting to burst: long-expiring US Treasury bonds.

Dissecting a Manic Bubble and Subsequent Crash

I took an on-line course at MIT on Behavioral Economics, and one of the topics was manias and asset bubbles. I'll leave out the higher math equations, and summarize what seems painfully obvious, but illustrative nonetheless.

Every asset bubble has similar characteristics, whether it's the Tulip Mania, the South Seas Bubble, the Internet Bubble, or whatever we experienced in 2008 (let's call it a Subprime Mortgage crisis).

1) First, you have to have a catalyst (tulips, internet, real estate, easy money),
2) Then, smart money insiders quickly claim stakes (railways, gold, securitization, IPO's),
3) Development of infrastructure to sustain the bubble for the mainstream citizens (setting up exchanges, networks, charters, assessors, government subsidies)
4) Authoritative blessing (government approval, official government support, parliamentary passage, AAA credit ratings),
5) The inevitable crash (stock market crash, real estate crash, defaults, bankruptcies, foreclosures),
6) Post-crash political reaction (regulation, litigation, fraudulent activity, accounting reforms, creation of government agencies).

The discomforting fact is that bubbles need an inflow of progressively more naive investors, much like a malignant tumor needs blood to metastasize. Prognosticators who predict these crashes in the midst of a bull market are demonized as heretics. These manias can be back-dated several hundred years, and the similarities are eerily haunting. Let's hope we don't go overboard with step 6 and put a death chokehold on our economy this time around.

Warren Buffett calls these instruments weapons of financial destruction

If the imploding of credit default swaps didn't put the fear of God in markets, this should:

Derivatives Market

The Bank for International Settlements (BIS) is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks.

According to BIS statistics, as of June, 2008 (before the financial meltdown), interest rate derivatives totaled $458 trillion, foreign exchange derivatives totaled $63 trillion, credit default swaps totaled $57 trillion, commodity derivatives totaled $13 trillion, equities-linked derivatives totaled $10 trillion, and unallocated derivatives $82 trillion. Total worldwide derivatives market: $684 trillion!

A quick glance at the figures reveals that credit default swaps, while huge in nominal numbers, is very small relative to interest rate derivatives (stock market derivatives are even smaller). If mispriced CDS can wreak such havoc on financial markets worldwide, what would happen if interest rate derivatives (fixed-income, i.e. bond markets) implode?

To connect the dots, easy monetary and fiscal policies arguably created the tech bubble, which burst 2000-2002. Those same ill-advised policies created a real estate and mortgage bubble, which popped in 2007-2008. Today, the government is embarking on another attempt to ease the credit crisis, but the unintended consequence is the creation of another bubble--the US Treasury bond market. But this time the magnitude of the interest rate bubble is orders of magnitude larger than the toxic credit default swaps which "insure" against US homeowners defaulting on their mortgages. The problem with CDS' is that they are not backed by any collateral (hence the ability to obscenely leverage up).

When the US Treasury bond bubble collapses--and interest rates soar, God help us all.