IceCap: "Which Bubble Is Created Next?"

Tyler Durden's picture

From the latest monthly letter by IceCap Asset Management

Selected excerpts from: Connecting the Dots

Rock star status is achieved by the very few. To be eligible, one must simply be held in a very high regard. It’s difficult to achieve, but once you’ve earned this distinguished level of recognition, in the eyes of many you can never do wrong. Until of course you do.

In universities, students no longer aspire to become hedge fund managers, or investment bankers – that is so 2000s. Today, the really sharp knives all want to become a central banker. Posters of Warren Buffett and Ray Dalio have been replaced with the Mona Lisa-like grins of Mark Carney, Ben Bernanke and Janet Yellen.

It is true that these masters’ of the universe control the levers that affect our global economy, but is the praise, the respect, and the power justified? Sadly, no.

Reading down IceCap’s memory lane, you’ll recall our November 2012 “Salma Hayek” publication which described how world leaders had two choices in the way to manage the global economy.

The first option was based upon economic theory by Friedrich Hayek who claimed that the economy couldn’t be and shouldn’t be managed on an acute basis. Mr. Hayek believed that governments should simply ensure there was enough money available. That was about it.

If only our leaders had listened.

Instead, the financial world we enjoy today chose the second option which was built entirely on the mislead belief of John Maynard Keynes, that man could in fact control or better still eliminate the business cycle by changing interest rates, changing tax rates, and spending more money than you own.

In theory, this approach works beautifully. Then it meets reality. From our perspective, reality arrives when there are no more interest rates to cut, no more taxes to cut, and no more money to spend.

Chart 1 shows the success enjoyed by the US central bank’s interest rate policy over the years. In 1997, the Asian crisis followed by the Russian crisis followed by the collapse of a gigantic hedge fund, allowed the American central bank to plant the seeds for the next crisis which turned out to be the tech bubble.

At the time, both financial pundits and the big banks with their balanced funds proclaimed that the world had indeed entered a different financial and economic era – yes, this time it was different.

Of course 4,000 Dow Jones Industrial and NASDAQ points later, the sheep started to lazily admit that perhaps this new post-Y2K economy wasn’t all that it was cracked up to be.

Not to worry, once again the American central bank mounted their ponies and rode the global economy straight into several years of ultra-low interest rates. The hope (there’s that word again) was that really cheap money would encourage people, companies and governments to borrow and spend again.

And borrow and spend they did – right smack into the biggest housing bubble in economic history. Day traders became passé, and the newest game in town was flippin’ houses. Rich people flipped mansions, plumbers and teachers flipped suburban homes and even Vegas strippers got in on the act and flipped condos among other things. By the time it was over, the entire world was flipped upside down – courtesy of the US Federal Reserve and their interest rate machine.

And this brings us to the next global crisis, which we assure you is on its way. After all, Chart 1 proves it is crystal clear that every time the US Federal Reserve acts to "save us" from one crisis, it directly sows the seeds for an even bigger crisis in the future.

The thing to understand about the US Federal Reserve is that although it makes decisions to acutely affect the American economy, it also directly affects the economies of other countries around the world. First of all, many countries do not have their own currency and instead rely upon the US Dollar. Others have their own currency, yet have it directly tied to the US Dollar and therefore the interest rate policies that come with it.

Since 2009, the 0% short-term interest rate policy, money printing, bailouts, implicit and explicit guarantees effectively been exported to the entire US Dollar world.

To put it another way, we estimate that only about 40% of America’s economic stimulus has actually stayed in America – the remainder has flowed elsewhere. But what has made this policy especially ineffective, is that the stimulus has been indirectly thrown at the economy in the form of lower interest rates and higher stock markets. In other words – these extraordinary stimulus plans are not March 2014 Connecting the Dot reaching the real economy and the average person on the street.

Now the curious thing about our world’s financial leaders is that they all read from the exact same playbook. It may come in different names, shapes and sizes but at the end of the day the Bank of England, the European Central Bank and the Bank of Japan all hum and whistle to the same tune as the US Federal Reserve.

This means all of the world’s biggest economies and biggest borrowers have 0% interest rates, money printing and explicit and implicit guarantees for various countries and companies who need to borrow money.

This point is important to understand and this is how you connect the dots to the next crisis on the horizon.

These extreme interest rates, money printing and debt guarantees have created the illusion that everything looks marvelous. On the surface, stock markets are rising, and bankrupt countries look beautiful when borrowing in the bond market.

Yet, when you strip away the wonderful headline news, you can see that no country is decreasing the money they owe. Worse still, new jobs and wages are not increasing enough to maintain an accelerating economy. This is an economic death sentence – debt totals continue to rise, not decline.

What this means is that the weakest of the weak countries are gradually reaching the point where either they won’t be able to borrow additional money, or implicit guarantees from a larger country will no longer be available.

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Full letter below (pdf)

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icanhasbailout's picture

The bubble they are blowing now can be accurately described as the Government Bubble, whether you're referring to the spending or the debt stacking side of it.

The Dunce's picture

The stock market is the new bubble.  But it will pop.  Then we'll create another bubble.  That's the nature of crony capitalism.  Bastards.

icanhasbailout's picture

You don't have the right sense of scale. The housing bubble was bigger than anything that can be done in the stock market. It's tens of trillions vs. a few trillion. The next bubble has to be of the next order of magnitude - 100s of trillions. And the real-world anything that I know of that works out to hundreds of trillions (of real money, not the theoretical money involved in derivatives) is the net present value of US government spending obligations.

saveandsound's picture

The next bubble is the currency-bubble.

Tech, Housing, Gov.-Bonds, Currency. There is no way to raise interest-rates without bankrupting the US- and other governments. No way to raise taxes without breaking the economy. The only exit is to devalue currencies, significantly.

Green arrow: un-tapering will be here soon (6 month to 3 years)

Red arrow: more "tightening" ahead ;-)

I wonder what it looks like when a currency-bubble pops.

icanhasbailout's picture

Currency alone isn't enough to do the job. The entire private asset base in the US is only about $55 trillion - and a great chunk of that is already owned by the folks who are on the winning side of these bubbles. As currency represents current wealth, no amount of currency can represent the amount of wealth needed to fund this next bubble.


Remember, each bubble causes damage on the order of its size, and in order to mask that damage, the next bubble needs to be an order of magnitude larger - or it doesn't move the needle enough to be effective.


Thus, the next bubble is going to have to attach wealth not yet created as well as as much of the existing wealth it can access - whole generations of labor worth. The only vehicle available to do that is by passing down debt obligations through several generations is via government debt, which doesn't go away when those who took on those debts die.

saveandsound's picture

hmmm, interesting view... I would suggest, the asset base in the US and elsewhere is just going to be priced higher in the future. Call it reflation, inflation, disflation, whatever... that is the purpose of printing money, isn't it?

If you take a look at the financial repression in the 50s ans 60s, and at the more sudden debasement in the 70s - in the wake of the banking crisis '66, Vietnam, Nixon dumping the Goldstandard and shortage in oil supply, you could get the impression how the debasement of currencies "worked".

If you want to milk the sheeple, you should not squeeze them to death.

Free Wary's picture

Wake up. there is no next bubble. You are already in the middle of the biggest bubble in history...

saveandsound's picture

It kind of looks like the beginning of an disaster bull market, indeed. In that case it won't pop.

Supposedly Detroit already looks a little bit like Weimar.

DOGGONE's picture

The fourth chart here
is "Recent Debt Jump Is 2/3 of That For World War II".
Do you suppose that much more is credible?

DOGGONE's picture

Here is my figuring, see section
Bubbles relative to GDP
near the bottom of

DOGGONE's picture

The Dunce,
My idea for a solution is showing these histories 'all over the place'.

The Public Be Suckered

Please consider action ...!
BTW, I am just motivated by this:
I am certain that it is a far, far better thing for our nation if the people have their heads OUT of their fuming darknesses.

NOZZLE's picture

Can someone anyone explain the share price of ChitPotle Mexican Gruel?  which somehow managed to achieve $622.90 fucking dollars per share by selling burritos with a P/E of 58?  Let me guess, they actually expect the revenues to match the current share price at some point in time.

Groundhog Day's picture

Some things just can't be explained





EggSlayer's picture

AMZN - not a fan

TSLA deffinitly has some potential - i see value in it

EggSlayer's picture

Chipotle though - that is unreal

aVileRat's picture

In some warped world market punters believe that ShitPolte will grow to the same size of a KFC and/or Tacobell, at which time it will be acquired by PepsiCo or some other conglomerate which is just a beta play on the rise of the latino middle class.

I honestly have no fucking clue who believes what I just wrote, but yes: that is exactly the pitch for why it's a screaming buy. Because for some reason when you can afford a 30 dollar steak oscar, Miguel will still rather have a mucho burrito with extra fava beans for lunch. People are also speculating Pepsi or Darden will be stupid enough to go long on expensive Tex-mex to wallpaper over their own "middle class" consumption problems.


TrustbutVerify's picture

Simple...Its pump (and soon) dump.

Carl Popper's picture

I hope cheap fusion power is the next bubble.  


We could terraform mars and Venus with cheap fusion power, build a 500,000 square mile umbrella to cool Venus down. 

detached.amusement's picture

...then we'd just have to worry about that 93 bar of pressure at the surface of venus there...


which, perhaps by sheer coincidence, is almost the entire reason why the surface temperature is what it is there.  shade it and it aint going to do a whole hell of a lot.


mars...good luck without a significant magnetosphere...



sounds like a perfect plan, from a government perspective.

RaiZH's picture

The currency bubble 

moneybots's picture

"Yet, when you strip away the wonderful headline news, you can see that no country is decreasing the money they owe."


So much for the idea that the FED is printing money.

Carl Popper's picture

Monetization of debt is printing money. It will never be unwound.  The Fed will never sell more than a token amount of all those securities it bought. 

Notsobadwlad's picture

We have quite a few bubbles bubbles:

1. The China manufacturing bubble with the accompanying US consumerism bubble

2. The financialization/derivatives bubble

3. The corruption bubble resulting in unearned income collecting in centers of power through graft and corruption

4. The global destabilization bubble

5. Data collection bubble

6. The propaganda bubble

7 The productive asset destruction bubble

Unfortunately none of the current bubbles create jobs or anything of value in the US. The issue is that the financialized money is created out of thin air and then misallocated and side-holed into price increases and corrupt dead ends instead of productive use.

The US and the entire west is awash with money and almost none of it is being used productively. I also disagree about taxes. Both direct and indirect taxes through regulation are increasing, not decreasing.

TrustbutVerify's picture

How about the buying-so-many-foreign-goods-to-the-point-the-average-person's-options-for-meaningful-employment-is-greatly-reduced bubble? 

Oldwood's picture

So if this has happened before, and appears to be cyclical, then all is good. A perfectly sustainable model. Just another buying opportunity? Is it really different this time? It sure feels like it.

f16hoser's picture

Gee wizzz... I've been out of college for awhile but let me take a stab at the problem: FIAT PAPER CURRENCIES SUCK SHIT!

How's that? Am I close to the mark?

Free Wary's picture

Yes and the US dollar is the biggest bubble of them all

Ghostdog's picture

No problem. Plenty of room to go negative on interest rates... So we have 100% to go after we turn negative which should carry us another 2 years for sure..........

Professorlocknload's picture

Would the next bubble be gold? When Mr. Yeller realizes it lost it with Taper BS and hits hyper drive print as the last bazooka barage? To save face, mind you. 'Course, with a face like that...ah, fergit it.

Jstanley011's picture

Risk is way under priced, which means that debt is way over priced, which means the bubble that is set to burst is that Mother of All the Other Bubbles, the 30+year-old bond market bubble.

boeing747's picture

Coming is Bond bubble along with tech bubble 2.0, housing bubble 2.0, energy bubble, student/car/creditcard loan bubble 2.0. After Bond bubble, we have $$$ bubble then USSA bubble.


Ham-bone's picture

can there be a bubble if there is no market?...seems we simply have a centrally derived price for bonds, FX, stocks, etc...the only potential bubble is the bursting of those in power or a schism among the elites as benefits flow to fewer and fewer of the .001%...infinite money buying finite assets, by that metric all assets are well under priced

q99x2's picture

Well if the countries all owe money to the Western central bankers the bankers can try take title to the nations assets and starve the citizens before the nations join the Chinese/Russian Federation.

Byte Me's picture

Near as I can see it's all very similar to the first 2 decades of the Fed's existence

RE bubble early '20s

Stock bubble Late 20s

Prior to that I'm a little hazy but wasn't there war bond buying / inflating away as well? In any event it's pretty clear what the problem is: Banksterism.

Calculus99's picture

Double Bubble Triple Bubble Fucking Trouble.

Free Wary's picture

The current bubble is the US Dollar, credit Ron Paul for saying it first and Mike Maloney's book for explaining it so I could understand it.

Chuck Knoblauch's picture

Hyperinflation bubble. Food price bubble.