By Mark Grant, author of Out Of The Box
The Art And Science Of Blowing Bubbles
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.”
-George Soros
Sometimes people, a vast majority of people, just don’t get it and so the present tense of the world goes on for a while until reality pops up or is forced upon them. It is rather like momentum which proceeds until the fuel runs out. Sometimes it is like living on Earth; the lack of recognition that hydrogen and oxygen surrounds you does not negate the fact that these two gases are present even though you cannot see them; you are still alive and breathing afterall. What we are used to, what we look for, are bubbles that reflect one asset class or another. In the past it has been Real Estate or dot.com or high tech or equities or bonds so that the search is constantly defined by some sector. Present conditions, however, dictate something entirely different, in my opinion, which is not one asset class or another as defined by relative valuation but all of the world’s asset classes as defined by global policies set by the world’s central banks acting in collusion. We are living in a gas house bubble.
[The Treasure Box Opens:] “The Bubbles, the Bubbles, the Bubbles.”
-Finding Nemo
I am often amazed how complicated people want to make things. It must take a great deal of time and effort to turn one + one = two into a geometric statement, set in algebra, defined by calculus and tortured into nuclear physics and then spewed out on television or in some board room presentation. The hours that it must take in hopes of aggrandizing the intelligence of the speaker must be agonizing. I prefer to spend my time in another fashion however. I find the mental exercise of turning the complicated into the simple to be a much more satisfying affair. No one may think of me in the first class of some brain trust perhaps but at least people can understand what I am trying to impart. The rigor of understanding you know is quite worthless if it cannot be explained and if you can’t understand something then the whole discussion is pointless.
“I’m blowing bubbles. Have you ever blown magical bubbles?”
-Ginny, Harry Potter
The black magic has been created by two bipolar experiences. Mr. Draghi, the Wizard in residence at the ECB, has promised unlimited amounts of new paper if the boys in Parliament give the nod and the bank itself, in the meantime, has bought football cards, shoe laces, soda caps and cereal box tops, declared them to be valuable assets, lent money against them and floated small pieces of blue paper in the breeze that can be used for lighting fires, cooking dinner and warming the hearth. In America we sell “full faith and credit” like Hallmark cards at the drug store and then we buy them back once they have been used and call them relics, antiques and valuable memorabilia. We merchandize in the Treasury, collect the artifacts at the Fed and spread decaying rose petals along the way. Everyone calls it art, everyone participates in the finger painting and no one is yet the wiser or if they are; they look the other way.
“Good morning to you sir. Would you care to blow a bubble?”
-SpongeBob
Now many folks think, and will tell you quite loudly and sometimes with hysterics, that this bubble will go on forever. They will rant and rave that the world is improving and they talk of green shoots, growth in the spring and they point to what they hated just moment ago, the markets, regaling in the fact that yields are declining. They do not mention the world awash with small new bits of green and blue paper of course or the printing machines in Washington or Frankfurt but they point to the yields and tell us that things are better; much better. They somehow, an oversight I am sure, forget to tell us that the actual economies, upon which all this is based, are in decline in Greece, Portugal, Spain, Ireland, France, Italy and the United States. Yes, for all of you that mistakenly think that I ignore the plights of my own country I hate to disappoint you but no blind eye is turned here. I can see Emperors clothed and unclothed and while I may miss a beat I do not miss the tune.
“As long as the roots are not severed, all is well. And all will be well in the garden.”
-Chance the gardener, Being There
So it will be Inflation or Valuation but the winds of change will sing once again. One day soon the world will awaken to find that the houses of Draghi and Obama have more debt than their equity value and the small pieces of green and blue paper have Kings and Queens and Jokers painted on them and then the story shall take a decidedly different turn. A mighty castle cannot be supported on a pinhead and the weight of the added debt will cause the bough to break. Carry on in the meantime, the roulette wheel rolls but just wait until the casino lights are turned off and you will discover just how difficult it is to play in the dark!
“Many can blow smoke rings but I can blow smoke squares. Just ask and I will show you.”
-The Wizard