What Blew Our Financial Bubble So Big?

What Blew Our Financial Bubble So Big? 1

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done.

— John Maynard Keynes

It’s not hard to notice that we are in the midst of Mr. Market swallowing a bigger dose of reality than he normally likes to take. One of my buddies who is quite cold blooded about investing cut her equity positions in a major way a few weeks back. What is perhaps more telling is that she had set up buy orders (she likes buying during dips) but has cancelled them. She also casually remarked that the Great Depression bear market was 20 years, but a more reasonable worst case scenario was the 1970s bear market, and that lasted 10 years.

She is comfortable she can see her way through that….but how many others can?

Now this may not be the start of a lasting deflating of a very big bubble. Plenty of very sound value oriented investment managers have been in a world of hurt for years expecting reversion to sensible valuations. And recall that Japan, which had an absolutely ginormous joint real estate and stock market bubble, didn’t have a dramatic unwind like our 1987 or 2008 crashes, but a fizzling over years.

But rather than trying to call a turn, since the market upset conditions do not come out of credit markets (which made it possible to foresee that the derivatives/subprime crisis of 2007-2008 could come to a very bad end), it might be more useful to ponder how we got into creating a hyper-speculative economy in the first place. Yes, I know some Howard James Kunstler/David Stockman/Caitlin Johnstone fire and brimstone might be more fun, in a world that has nor just normalized but even celebrated patent stupidity like NFTs and SPACs but maybe I’ll work myself up to that later.

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