The Nothing/Everything Crisis
Did “nothing” in particular just pop the “everything bubble?” I explore that idea and explain what I mean by it.
The Everything Bubble
Even though there is no way to know yet, let’s for the purposes of this article assume the stock market bull run (led by US stocks, but felt throughout most of the world) from the end of the 2008 financial crisis to 2018 was/is a bubble.
Now let’s note that this bubble, although very visible in the stock market, isn’t just limited to the stock market in theory. Instead, it is more broadly a potential US student loan bubble, national debt bubble, corporate debt bubble, etc (it is then, for lack of a better term, an “everything bubble“).
After-all, it was central bank and government policy backed by cheap credit and ample debt that led to the market recovery after the financial crisis and the subsequent bull run, and that course of events didn’t just impact stock prices, it impacted global credit and debt markets (the biggest markets in the world in terms of raw value; see USDebtClock.org for an example of their scale).
Now let’s assume the stock market bubble has popped (many but not all major world markets have currently entered a correction or proper bear market).
Now let’s ask ourselves, “if the bubble has indeed popped, then what was the pin that popped the bubble?”
What is a pin? In this instance a pin is a catalyst. It isn’t what causes an economic bubble, it is what pops an economic bubble. In this article I’m exploring the idea that “there is an everything bubble” and that “the pin” that popped it is not “something” but instead essentially “nothing.” I’m not saying what caused the bubble has no substance, I’m exploring the idea that the pin that popped it has no substance.
Looking At the World Markets
First, before we look into what popped the bubble, we have to confirm it is reasonable to say, “the bubble could have already started pop.”
The best way to do this is to look at some major world markets. I’ll pick US, Mexico, UK, Russia, India, China, and Japan for a nice spread to see what state they are in.
We will look to see each is in an uptrend or downtrend, and if they are in a downtrend, we will look at when the all time high was.
Doing this will also help us to understand what events could have caused the decline.
We have a few general groups (the symbol next to the country is the index I’m picking to represent it; feel free to study each chart yourself at tradingview.com/chart/):
- In a bear since before 2018: China (SHCOMP)
- In a bear since Oct 2018: US (VTSMX), Mexico (MXX), and Japan (Nikkei)
- Looking toppy and down from the high as of mid 2018: UK (FTSE) and India (NIFTY)
- In an uptrend (but down from the all time high): Russia (MICEX)
Bottomline: Although not all the markets noted above are bearish, all are down from their top, including the very important US market… and thus it is reasonable to ask if the bubble has popped. And, since that is reasonable to ask, it is therefore reasonable to look for the pin.
NOTE: A classical bubble goes parabolic and then sharply declines from its peak. From there it enters a bear trend, where it can never fully break its previous highs with conviction. We aren’t far enough along to know if this will be a popped bubble, we are only far enough along to see that it could be.
If it is that the Bubble Did Pop, then What is it That Popped it?
If the bubble did pop, and we won’t know until the market structure has fully formed, which could take years, then the logical question is “if it did pop, what popped it?”
And here we get to the crazy part…. I would submit to you that essentially nothing (aside from fear and worry) in particular popped it.
Consider the following events that have picked up steam in the time that the above markets as a whole started to decline:
- Fear of a Slowing Global Economy. Sales are strong, US tax cuts are helping, trade wars are hurting, etc. Early 2018 growth was a little stronger than late 2018, but all of 2018 was strong (in terms of sales growth, in terms of GDP growth, in terms of jobs growth). Bottom line here is the economy is still “strong” (by GDP data, inflation, jobs data, etc)… but it is slightly less strong in the second half of 2018 than the first half. <—- It is logical that a market would get the jitters, a decline in GDP and a decline in stock values is a bad “late stage” market cycle mix…. that said, markets certainly got a lot of jitters for the slight downtick that occurred in practice.
- Brexit Fear. <— Could reasonably have impacted the UK.
- Fear Over Rising Interest Rates in the US. This is the fear that it will lead to a slowdown in growth and potentially defaults on corporate debt (and generally elsewhere due to the easing up of post-financial crisis low interest rate / cheap credit policies). Also, everyone was waiting for the US yield curve to flatten, it did and everyone panicked. <—– Logically pumps the breaks around the world a bit as the US pumps its breaks… but one can’t help but feel the yield curve business was a self fulfilling prophecy.
- Trump Fear. Fear of Mueller and Trade Wars. Fear that the tax cuts won’t produce the growth we hoped and instead will compound debt (especially for companies who used the cuts to buy back shares before the market went into bear mode). <——- Logically the intensity of Trump policies and rhetoric has created some unease in the US and that has a ripple effect on local and global markets.
- Democrats Won Some Seats Fear. There was an idea out there that Democrats taking seats would make GOP governing harder. <—- that isn’t not true; there was a government shutdown over Trump’s wall.
- The Fear of Populism and Authoritarians. There is some political unease in the world, many consider “populists” and “authoritarians” to have come to power in some of the most important nations in the world.
- A Decade Long Bull Run; And the Fear that it Has to End Some Time. <—— What goes up has historically come down, this could be a problem, it is probably the main problem.
- The Fear of Loose Credit and Record High Debt (national, corporate, personal). The Fear that it can’t just compound forever. <——- Interest on debt over time can create an impossible situation.
- The Fear of High, but not record high, premiums on stocks (meaning the sticker price of many stocks is a historically high multiple compared to book value, sales growth, revenue, etc). <—— At the lowest points in stock market history most companies traded near book value, we are far from that being the case today, today we factor in projected growth (and arguably rightly so).
- The Fear of a Slight Slowdown in Sales; but again… respectable economic growth and healthy inflation in most nations listed. In Q3 2018 companies started missing the really bold targets of analysts. But, is it the targets or the companies to blame here? <—- The premiums noted above are dependent on growth. No growth, no justification for the premium.
- Fear of the bots. Trading Bots (“Algorithms”) and Traders playing the downtrend. Traders don’t like to lose money, if there is a downtrend, they will react accordingly. Without getting complex, traders feed into uptrends and downtrends. <—— a downtrend can become a bit of a self fulfilling cycle.
- The Panic of those who enjoyed the past 10 years. Those who have been funding their retirement accounts f0r years are like a powder keg that could explode if things get to rough. <—— without the average investor a market is just hedge fund A trading stocks with banker B trading with corporation C. To rephrase hedge fund A trading with credit giver B with indebted C (so a hedge fund making money short while B and C death spiral)…. yikes.
- The Fear of the Classic Bubble. The Current Price Action Since the Financial Crisis looks like a Classical Bubble. <—— hard to tell people it isn’t a bubble when it looks like one.
- Fear of the Technicals. Because the sell off did occur, the charts now don’t look good technically speaking (at least on smaller time frames, on larger time frames it is less gloomy). <—– “Smart Money” and “Bots” don’t tend to “go long” in a downtrend (they sell the rip, not buy the dip). The fact that we are in a downtrend puts pressure on the market to stay in a downtrend.
- The Correction Was Overdue. This one isn’t really fear related, but one could argue that the market was ready for a correction in 2016, but rallied over Trump and now it is a little exhausted which is causing on overreaction. <—— This is pretty logical, you can see on a chart that the market almost went into correction over the 2016 election, but then rallied pretty hard under Trump. I think he maybe could have delivered the moon and we would still be facing a natural correction.
So on one hand there are a few reasons to be cautious, the bull is getting “a little long in the tooth,” although economies are doing well there are a few signs of slowdown, and there is a lot of big debt and cheap credit going around (but that is tightening).
Meanwhile, although Trump / Brexit is simply democracy in action, that brand of politics is hardly “politics as if done by bankers and bureaucrats” and that potentially adds in some global worry.
Lastly however, and this is I think big, it seems to me like in general what is happening is that “fear of what could be” is causing uncertainty and doubt and that is being reflected in price charts which are being reacted to by traders / investors (be it Mom selling, Buffet staying in cash, or trading-desk-bot-x selling/shorting technical resistance).
TIP: Normalizing interests rates means moving them up from near zero to about 3.5%. We are already near 2.5%. That isn’t exactly a cataclysmic event.
TIP: The chart below shows what I might call Minsky’s credit/crisis cycle, how speculative finance and credit create economic bubbles and the role human psychology plays.
Is FUD and Algos Enough to Cause a Great Depression 2.0? Or Should We Be Focusing More on a Looming Credit/Debt Crisis?
The main question I want to ask, with all that covered is:
“Is all that “fear, uncertainty, and doubt” + traders playing the hand they are dealt using emotionless algorithms + emotional sellers really enough on its own to cause the Great Depression 2.0… in spite of economic growth and tax cuts and such?”
It seems to me like there needs to be a fundamental reason for a bubble to pop.
The house bubble created the global financial crisis, because the world’s banks had created speculative products based on inflating housing prices. Thus, when the housing bubble popped the cards came tumbling down… and this was perpetuated by fear and traders. Thus the housing bubble + bad lending practices + products based on that lending was the pin.
So what is the fundamental reason here?
Well, I know I called it “nothing” (because nothing has actually happened yet, and for now it is just the fear of something)… but anyway, let’s at least create a possible scenario that makes sense to get an idea what a narrative might look like down the road. Maybe it is something like:
In the near future: The stock market bubble created the great everything criss of tomorrow, because the world’s banks and companies had speculated on debt based on low interest rates, inflating stock prices, and sales growth. Thus, when fear over political turmoil and rising interest rates led to a [somewhat natural] correction after a 10 year long bull run… in a market that had recently went parabolic due to Trump hopes and US tax cuts (mental note; stimulating an overstimulated economy is probably not the best way to promote steady growth)…. and then when growth slowed instead of ramped up, it crated panic selling in the stock markets, which left corporations losing money on stock buy backs (thus wasting tax cut money) and unable to pay back debt, which left banks with a bunch of loans being defaulted on, which left less tax revenue for the state. And worse, with interest rates on the rise the whole time, banks had a bunch of near worthless bonds from the lower rate years on their balance sheets…. which all put downward pressure on bank stocks, which reminded everyone of the last crisis and caused epic fear-based selling, which the bots traded gleefully. Thus, the everything bubble + bad lending practices + products based on that lending set the stage and fear itself was the pin.
Something like that. The theory I laid down above is messy as it stands now, but if it all goes bust, then at some point in the future we should be able to see it clearly and I can write a follow up article that is academic instead of speculative and loose.
And that brings us to the good news….
Is There a Potential of a Brighter Future?
… The good news is, everything above is just speculation, and really all I’m doing is a little mix of examination and philosophical exercise.
The bubble doesn’t have to have popped, the current market structure could end up playing out in a healthy way where we don’t see epic ups and downs but instead see normal sized correction and then decades more growth (with normal sized corrections sprinkled throughout; like the projected for-educational-purposes chart below that sees a 10x increase in the NASDAQ 100).
TIP: In the chart below I just copy and pasted a fractal like pattern onto a logarithmic chart. That is probably unrealistic, in reality if this did occur I wouldn’t expect such a drastic increase… although the same sort of pattern might play out with a little less of a vertical incline.
The reality is, it is never over until it’s over.
Fear in politics could give way to a more comfortable tomorrow.
Taxes and interest rates can adjust, lending practices can be shored up, rules can be put in place for trading bots, the Buffets of the world can put their capital back in the market.
Minsky doesn’t need his moment, there doesn’t have to be a credit / debt crisis.
We don’t need Trump to in retrospect be a scapegoat.
We don’t need never-ending trade wars and walls and populist uprisings.
Nothing says that every ten years we need to have a financial crisis that ruins lives. There is no rule that every X years authoritarians and populists must turn into tyrants and start world wars.
Nothing says this support can’t hold and reignite an uptrend.
Nothing says 10x – 14x earnings isn’t a fair multiple for the best companies in the world.
No one knows if the bottom is in.
Pensions, retirement accounts, they don’t need to be liquidated.
Nothing says history has to repeat.
However, and problem is, humans are predictable and history tends to repeat.
The tech bubble, financial crisis, Bitcoin bubble, Great Depression, Tulip bubble…. human speculation based on credit and emotion and political reactions have a tendency to work like clockwork.
That is to say, if the problem is the human condition, and if the algorithms are only making it worse… then, like, that isn’t a good sign.
Since credit is still credit, humans are still humans, and apparently the bots are even worse than the humans when it comes to the cycle, it is likely that at some point in the future I’ll have to write the follow up to this with a heavy heart.
… Also, while I’ll be able to discuss the causes of the bubble pop in retrospect if it does go that way, I have a feeling that I’ll be able to stick by the idea that “nothing” (AKA fear of something, but not something actually happening) was the pin that popped the bubble that threw the world into chaos. And that is poetic / F’d up.
TIP: The chart below is just another projection, like the chart above. This one however shows the different parts of the overarching fractal. The last two are projects, as is the RSI under them, the non-faded boxes and price action did occur (although this should all be obvious from the dates).
Bottomline: See the chart below? That is generally what the human condition produces when given some hope and credit. Phase 1. hope (Obama years), 2. euphoria (Trump), and then 3. ideally a slight correction, if not at least you are hoping for complacency…. but sometimes it all goes bust and you get a recession/depression filled with anxiety, fear, anger, and depression.