Musings Report #17 4-25-14 Bubbles, Bubbles, Everywhere

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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.

A Busy Month

It's been a busy month, between finishing my taxes, finalizing my new book Get a Job, Build a Real Career and Defy a Bewildering Economy for its April 11 launch and doing seven guest interviews in the past three weeks across a range of radio and web-based podcasts. As always, I appreciate your patience and understanding regarding email--I do my best to answer your correspondence before any other emails, but this month has left me woefully behind.

Bubbles, Bubbles, Everywhere

A farcical debate has been playing out in the mainstream media on the question, are stocks and real estate in a bubble?

The conventional view is of course "no," i.e. that asset valuations can remain at high levels essentially forever based on ever-higher profits, GDP, etc.

I've written before about Peak Everything, the idea that we're in an era not just of Peak Cheap Oil but of peak centralization, peak intervention, peak regulatory burden, peak student debt and so on.

Bubbles are extremes that pop and revert to the mean; Peak X is the absolute zenith of a system of production that is declining as resources are depleted and costs of extracting value rise.

Bubbles are reflections of human nature's propensity to join the crowd--when the crowd is euphoric and confident, then asset prices rise to unimaginable heights. When the crowd turns anxious and fearful, assets crash back to earth in roughly the same length of time they took to reach the bubble top.

Peak X (with X being any non-renewable resource) is generally a physical process of extraction, depletion and rising costs that does not change regardless of the herd's emotional status. But human emotions and the herd instinct influence our reaction to Peak X.

Thus we have one herd who denies Peak X is real and another equally adamant that Peak X will be ruinous.

What interests me in this particular moment is the bubbles not just in assets but in faith in centralized solutions to complex problems, in complacency, passivity and denial, and a faith in political solutions to problems that are not amenable to political fixes.

In other words, bubbles arise in various crowd-based emotional states that are disconnected from real-world feedback. This is the entire purpose behind rigged statistics and propaganda: to create a phony feedback that supports the official view that "we know what we're doing."

Thus the crowd currently seems to believe the Federal Reserve can actually manage the complex economy with its two levers of interest rates and liquidity--a faith that will be revealed as baseless at some point in the future.

The same can be said of the Chinese leadership's supposed ability to deflate the world's greatest credit bubble to a "soft landing" that leaves growth, collateral and financial stability all safely intact--an impossibility given the inherent instability of credit bubbles, regardless of who is nominally in charge.

The ultimate bubble is the faith in highly centralized control mechanisms to adjust complex, inherently unstable systems without error or mishap, when the reality is that centralized control is itself the key dynamic creating systemic instability.

Summary of the Blog This Past Week

Measured by Gold and the Dow, Wheat Is Cheap (But Maybe Not For Long) 4/25/14

I'm 60 Years Old and Took the Army Physical Fitness Test (APFT): Here's My Score 4/24/14

This Is How Empires Collapse 4/23/14

The Political Poison of Vested Interests 4/22/14

Sorry, Fed Inflationistas: Technology Is Deflationary 4/21/14

What's Cooking at Our House: Ciambella 4/19/14

I received very little interest in my Army Physical Fitness Test entry; readers seemed to favor my list of 12 factors behind the decline and collapse of empires.

Best Thing That Happened To Me This Week

I visited the Disney Family Museum in the Presidio in San Francisco with my friend from intermediate school. We lucked out on sunny weather, and one exhibit confirmed a family connection to Walt Disney: my Mom's uncle Max Maxwell was one of the fellows Disney persuaded to join him out west in Hollywood....

Market Musings

For five long years, the engine of higher equity and real estate prices has been liquidity--abundant cheap money that flows into whatever asset class offers a return above 0%.

I'm beginning to think this reliance on liquidity is akin to metabolic syndrome, i.e. pre-diabetes: as the system loses its sensitivity to feedback, it eventually spins out of control.

In the sugar-insulin system, the body loses sensitivity to insulin and blood sugar rises to dangerous levels. In the financial system, liquidity is continually injected in overwhelming doses to keep asset prices elevated. At some point, the system loses sensitivity to liquidity and asset prices crash despite an abundance of cheap credit.

Few believe this possible, but consider this chart of the NASDAQ, which is displaying a classic head and shoulders pattern:

I suspect this is an early technical signal that the liquidity flood is no longer enough to keep real estate and equity valuations at bubble levels.

From Left Field

Time lapse drawing of an imaginary city expanding -- captivating 6-minute video set to Danse Macabre by Camille Saint-Saens -- This reminds me of a book I recently read-- How Paris Became Paris.

The Shopping Mall’s Socialist Pre-History -- interesting thesis....

How politics makes us stupid -- let me count the ways....

China's Smog Splits Expatriate Families as Companies Pay for Fresh Air -- the bloom is definitely off the urban rose in China....

Ex Pharma Rep Reveals Dirty Secrets of the Drug Business -- "let us educate you on the wonders of our new med..."

The Distribution of Household Income and the Middle Class -- what is middle class? Here's one attempt to define middle class income...

CBO:Top 40% Paid 106.2% of Income Taxes; Bottom 40% Paid -9.1%, Got Average of $18,950 in 'Transfers'

U.S. Household Incomes: A 45-Year Perspective -- good charts...

The Richest Rich Are in a Class by Themselves -- top .01% and top .1% -- this made quite a splash....

Beef prices hit all-time high in U.S.: Extreme weather has thinned the nation's cattle herds, roiling the beef supply chain from rancher to restaurant

10 Japanese expressions that sound delightfully strange and funny when translated

The Tower of David – Venezuela’s “vertical slum” (via Lew G.) -- self-organizing "slum" might be the wave of the future.... reminds me of Mike Davis's book Planet of Slums....

"Being alone has a power over me that never fails. My interior dissolves (for the time being only superficially) and is ready to release what lies deeper. When I am willfully alone, a slight ordering of my interior begins to take place and I need nothing more." Franz Kafka, Diaries

Thanks for reading--

charles