Time Wounds All Heels When The Levy Breaks

Despite short-term memory loss affecting most investors, asset bubbles tend to crash with a vengeance. From over-valuation, risk ignorance, and reactionary sentiment, the current bubble-trifecta shows signs of turning over.

The monetary powers that be have succeeded in creating serial asset bubbles. Each is extending from the great expansion of credit pivoting on the last official dollar default in 1971.

And yet once, again we are bombarded with the mantra: “This time it’s different”. Partly, it is true. From a monetary standpoint, we’ve been spiraling from one overextended extreme to another for the last 100 years.

Of course, it is difficult to compare this period with the last – just before the crash. The latest cliff involves three enormous bubbles, not just one.

Equities ($18 trillion market cap) have risen to all-time nominal highs despite a weakening economy. The $40 trillion (total outstanding) U.S. bond market has been in a bubble for so long that it has become the fabric of everyday macro-investing life.

Considering the ongoing and overt manipulation of interest rates to unnatural levels, an emergency waiting to happen.

There is no comparison to bubbles past.  The consensus reports what is best for its own interest. Two tiers of justice to match the propaganda machine of two tiers of information.

Some of the most entertaining content in the aftermath of the financial crisis came from the ludicrous attacks against those who saw what was coming. Peter Schiff was right – phenomenon permeated the interwebs.

Sadly, few have learned.

Despite clear and overt manipulation of key interest rates and obvious headline data adjustment, the cheerleaders are back in full force again. Just in time for the next crisis.

Each successive bubble is further out of the realm. But a long enough time line, you will have new generations that replace the old and forgotten mistakes.

The main drivers of these markets are not valuation, or even fundamentals, but perception.

Risk moderation is a joke. Portfolios are balanced by how much leverage they can get away with. Not on the potential losses.

Don’t fight the Fed; the belief that the Fed is omnipotent is a strongly held belief.

Who can blame them? If your job and bonuses depend on it, and these (zero rate borrowing) gifts keeping coming, it is like manna from heaven or the most powerful force in nature...

How We Got Here…

Old habits reappear

Fighting the fear of fear

Growing conspiracy

Myself is after me

Frayed ends of sanity

Hear them calling

Frayed ends of sanity

Hear them calling

Hear them calling me

- Metallica - "Frayed Ends of Sanity"

The Fed and its low interest policies have distorted asset markets beyond recognition.

Purchases of Treasuries and MBS created false liquidity that flowed direct to securities.

This reverberated into world equities and throughout the corporate bond markets.

Runaway corporate debt has triggered a safe haven-fueled run toward Treasuries, further inciting an already extreme bubble.

The perception of the firms that the Fed will provide unlimited support for these paper securities.

It is the impact on the traditionally higher risk segment of the exotic world of corporate “structured finance” that sharpens the needle.

The premium placed on risk has collapsed. This creates by far the greatest distortion, matched only by the height of subprime housing lending between 2005 and 2007 in addition to the equivalent in sub-prime auto lending and student loan debt we see now.

We are beyond fixing. The only solution would be for the Fed to step away. Good luck with that.

The Equity Bubble

The main drivers of these markets are not valuation, or even fundamentals, but perception. The perception is that somehow the Federal Reserve has the power to keep the stock market suspended.

The Fed has now created $Trillions of currency and bank reserves that must be held by someone and because of this faulty perception of risk, investors are willing to hold them as they search for near term returns.

The Fed may be able to postpone the eventual collapse, but each moment we continue on this path makes the aftermath that much worse.

Each time we go here, it is the same. From 1929 to 2000 and 2007, all peaks shared the same extremes.

Overvalued, overbought, over-bullish.

The polar opposite of the least favored asset class – precious metals – and especially silver.

In the end, these speculative experiments never unwind slowly.

All it takes is a change in perception. When risk comes crashing into the excel spreadsheets. That shift in risk mirrors the organic market turmoil.

Often, the cost of credit widens before the equity fall. Black swans may induce this. But not always.

The music stops, and markets go bidless when institutions see risky assets for what they are.

Yield becomes a secondary concern as the ‘return of’ takes precedence.

Trend followers take on the most losses, unable to imagine selling just below the highs and addicted to dip buying.

But once they start selling, it all happens overnight.

Things become truly out of control when all sides and observers seemingly forget what they are fighting over – when the source of conflict becomes so far buried that it’s meaningless and pure emotion.

This parallels the financial system.

While no one can say when the levy will break, we need not look too far back in time to know that’s arrival is unmistakable.

The frayed ends of market sanity coalesce into raw fear. Abject fear amongst already bullish prospects for precious metals has a tendency to break the bonds of manipulation.

While most of you reading this understand that physical assets cannot go to zero, paper assets can – and do.

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