What Hardcore Pornography Can Teach Us About Asset Bubbles

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Submitted by Omid Malekan via Visual Stories blog,

Last week, the stock of an otherwise unknown company named Cynk Technology went parabolic, even though per its own filings the company had only 1 employee, no income or revenues and a poor looking website as its only asset. Although this sort of shenanigan is common in the shadowy world of micro-cap penny stocks, what caught everyone’s attention was the fact that at one point the company reached a value of over $5 billion, reminding some of similar moves in worthless stocks at the peak of the last stock market bubble.

A few weeks before that, the cost of borrowing money for the Spanish government collapsed to an all-time low. The biggest determinant of what interest a borrower has to pay is its perceived ability to repay the loan, and it was only a few years ago that Spanish rates spiked to almost triple what they are today on account of an economic crisis born out of too much debt and not enough growth. So what changed for Spain that led the market to suddenly believe its now safer than ever? It certainly wasn’t the amount of debt the country still carries:

 

Nor was it a rebound in economic growth, or a significant drop in unemployment:

 

The only explanation that remains is a sharp appetite for risk.

Turning to something less pedantic, the contemporary art market has gone parabolic as well, and whispers of a bubble abound. What is unusual about the current art boom is the fact that buyers are tripping over themselves to bid up the works of living and active artists, where theoretically there is endless supply.

Some may argue that contemporary art is the playground of stuffy society types and has nothing to do with the rest of society, and they would mostly be right. So what’s the furthest place we can go from the confines of a fancy auction house? How about a mechanic’s garage. The classic car market is also on fire, and the gains are not limited to just fancy German sports cars:

 

It wasn’t that long ago that everyone – including the hardcore car guys – understood a car to be a “depreciating asset” – something that almost always lost value over time and should only be purchased as a toy by those with cash to burn.  Now any old Porche is an investment in your kids future.

If real estate is more your speed, then there is the booming New York City luxury apartment market. Current stories of people entering complex contracts to buy expensive housing a few days after only seeing a floor plan are unheard of, except for right at the peak of the last property bubble. One57, the building made famous by its crane collapsing during Hurricane Sandy, will be the tallest residential building in New York when its finished this year, and it reportedly has multiple units in contract to be sold for over $90 Million. Rumors have it that some brokers are pitching the units to be as safe as Treasury Bonds. Not to be outdone, a few blocks away is 432 Park Ave, which when completed in 2015 will not only be the tallest residential building in New York, but its tallest building period. Since no real estate bubble is complete without plans in the works for something even more outlandish, enter the proposed Nordstrom Tower, also on 57th street. This one will not only top all other buildings in New York, but all residential buildings anywhere on the planet.

Its hard to have an asset bubble without a concurrent debt binge, so here we areDon’t worry if you don’t understand the technical details of the latter article. The main takeaway is that what is happening now is one of the few things that most people agreed was a major cause of the last financial crisis, so much so that the wildly popular This American Life radio program dedicated a full episode to it.

Exactly 50 years ago last month the US Supreme Court ruled on the now famous case of Jacobellis v. OhioAt stake was whether a French movie with graphic sexual content could be outlawed by the state via its obscenity laws. The court ruled that it could not because the film wasn’t hardcore pornography. How could they tell? In an explanation that has now turned into one of the most famous quotes in court history, Justice Potter Stewart explained that although he could not define exactly what hardcore porn was, “I know it when I see it”

Like porn, asset bubbles are also hard to define, but given our economic history, and especially our recent economic history, we know it when we see it, and now we see it everywhere. There is a good reason why this was one of the most emailed stories in the New York Times recently. We all see it. Apparently the only people that don’t see the bubbles are the people creating them.

The one common diagnosis by experts in the worlds of stocks, art, cars, real estate and debt is the the role central bank money printing is playing in their industry. Since the start of the financial crisis 6 years ago banks like the Federal Reserve, the European Central Bank and the Bank of Japan have printed trillions of dollars. We know that money has not gone towards much of the real economy because growth remains weak, jobs remain scarce and wages remain low. But the money had to go somewhere, and the asset bubbles listed above show us where. Although we’ve all seen the destruction that bubbles cause when they burst first hand, the Central Banks go on pumping.

When the last bubble burst, only 8 years after the previous one, many asked why the Fed and other Central Banks didn’t see the problem coming. Then Fed Chairman Ben Bernanke, the godfather and primary architect of the current money printing regime, had this to say on the subject:  “Although the house price bubble appears obvious in retrospect – all bubbles appear obvious in retrospect.” In other words, you can’t see the bubble when its happening. Bernanke’s professional and philosophical heir Janet Yellen has recently said its too hard to see if Federal Reserve policies are leading to bubbles, so they’ll just keep printing as if everything is fine. 

When our current asset bubbles finally burst and cause the usual havoc, the central bankers and economists that helped create them will yet again claim they could not have seen this coming. This time around we will know they are lying, and would be wise to ask what drove their willful ignorance.