Bacon's Rebellion

Democracy Thrives in Sunlight

Signs of the Bubble Economy…

—

by

James A. Bacon
in

From Virginia Business magazine: Charlottesville-based Blue Ridge Bank has made it possible for customers to purchase and redeem bitcoin at its ATMs — the first commercial bank in the country to do so. Blue Ridge Bank cardholders can purchase and redeem the virtual currency at 19 locations across the state. A year ago, bitcoins were worth $6,000 each. Today, they’re worth approximately $45,000.

By all means, let’s make it easier for small, unsophisticated investors to speculate in highly inflated and volatile cryptocurrencies!

Last August Michael Saylor of Tysons-based Microstrategy invested a quarter billion dollars in bitcoin on the premise that massive fiscal and monetary stimulus in the U.S. and other central banks around the world would be highly inflationary. His bet is looking brilliant at this moment in time. More recently, Elon Musk of Tesla fame — Tesla shares ballooned 7.4 times in 2020 on rampant speculation — has endorsed bitcoin. Don’t get me talking about the GameStop frenzy or the IPO boom for companies that have yet to make a profit. The scary thing is, we haven’t reached peak crazy yet.

The next COVID-19 relief bill will inject another $1.9 trillion into an economy that is growing and needs no more economic stimulus. One of three things will happen: (1) The bubble will burst and there will be a systemic crash, likely global in scope; (2) the bubble won’t burst but the U.S. will get massive inflation instead; or (3) the laws of economics have been repealed, and the political class will spend happily ever after.

If you don’t believe in option 3, you’d better prepare for options 1 or 2. Once upon a time, I entertained the fantasy that, by showing fiscal discipline and finding more cost-efficient ways to deliver core government services, Virginia could escape the consequences of our national folly. I don’t believe that anymore. Virginia’s political class is as short-sighted and delusional as any state’s. I used to make the snarky comment that Virginia was becoming New Jersey. I have to revise that. Virginia is becoming California… without the wealth-generating machine of Silicon Valley. Indeed, as a wag in the Bacon’s Rebellion comments observed, California is taking lessons from us!

In his newsletter today Chris Saxman, executive director of Virginia FREE, sent out a pessimistic missive opining on the many signs of political and moral decay in the nation today. “Our binary political system,” he said, “is a rotting, corrupt corpse enabled by its most loyal customers who sadly comprise only 15% of the electorate and 7% of the population.”

I share that sentiment…. Except I’m even more pessimistic. The stinking, rotting corpse of a political system sits atop a stinking rotting corpse of an economic system. When the economy collapses, and middle-class Americans who’ve pinned their hopes on Tesla shares, GameStop shares, and bitcoin lose everything, and more prudent Americans who’ve played by the rules see their life savings ravaged by inflation, and all the while the rent seekers get rich, there will be a reckoning the likes of which Americans have not seen in a very long time.

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33 responses to “Signs of the Bubble Economy…”

  1. Eric the Half a Troll Avatar
    Eric the Half a Troll

    “The next COVID-19 relief bill will inject another $1.9 trillion into an economy that is growing and needs no more economic stimulus.”

    Wasn’t that the same situation we were in when Republican force fed their tax cut for the rich on us saying we needed more monetary stimulation…???

    1. James A. Bacon Avatar
      James A. Bacon

      Yes… other than the fact that you mischaracterize the logic behind the tax cuts. But, if your larger point is that Republicans share the blame for runaway deficits, you are correct.

  2. CrazyJD Avatar
    CrazyJD

    Not to put too fine a point on it, but you made similar arguments in Boomergeddon. I have a slightly different take.

    In the past we have relied on growth in the growth sectors to keep debt as a percentage of GDP at bay. There is no reason to think that this growth won’t continue. If you look at the free cash flow of some of these companies, you come to understand why their shares trade at such high P-E ratios. By any rational measure, they are now overpriced. But I continue to believe that the money to be made by these companies will continue to grow, sometimes exponentially versus traditionally capitalized companies.
    Think of it this way: If the capital of a company goes down the elevator and out the door at 5:00pm, so to speak, you are very probably looking at a winner.

    The losers in this deal are wonderfully portrayed in Kurt Vonnegut’s 1957 novel Player Piano. You could look it up. We are rapidly approaching that status. The current administration’s policies will hasten the day.

    1. James A. Bacon Avatar
      James A. Bacon

      Federal tax policy has boosted free tax flow by cutting corporate taxes. Federal monetary policy has boosted free tax flow by flooding the market with cheap debt, allowing corporations to substitute cheap debt for expensive equity. Corporate America is more highly leveraged than ever. That’s great when the economy is growing, not so great when it’s shrinking.

      Biden & Co. is not likely to cut corporate taxes. More likely, they will increase corporate taxes.

      The Fed likely will do everything within its power to avoid raising interest rates, but now that interest rates are near zero, the Fed has little power to cut them…. unless interest rates turn negative on an inflation-adjusted basis. But that implies inflation. And you’re old enough to remember what happened to the economy in the 1970s. I’d say that 70s-era “stagflation” is the optimistic scenario.

  3. LarrytheG Avatar
    LarrytheG

    More than a few economists now are agreeing with the idea that as long as you grow – you can keep up with the deficits and interest – and so far – T-notes don’t have to pay much interest at all to attract no shortage of buyers.

    I had always understand that we use stimulus when the economy is hurt and then pay back the debt when the economy recovers. Of course no one, really wants to pay it back if it’s their increased taxes that do it.

  4. Nancy_Naive Avatar
    Nancy_Naive

    I’ll go for Door #3. But, wouldn’t surprise me to see the market lose this year; it’s oversold. It happens. Remember, the sample mean for 70 years of S&P500 is ~+7% with a standard deviation of 15%.

    Pickers market.

    1. Nancy_Naive Avatar
      Nancy_Naive

      Overvalued! Bleah! Horrible night. If you’ve never had a twitch in your ear…

  5. JRegimbal Avatar
    JRegimbal

    Read this article from Barron’s carefully. It makes me more optimistic than most. Yes, federal debt is out of control, and the latest $1.9 trillion plan is wildly excessive, but U.S businesses and citizens as a whole have been pretty frugal throughout the pandemic.

    https://www.barrons.com/articles/2021-could-kick-off-a-new-era-of-prosperity-but-first-there-will-be-some-bumps-51608329701?mod=past_editions

    1. James A. Bacon Avatar
      James A. Bacon

      The Barron’s author makes some valid points. Let’s see what he has to say when the bubble bursts.

  6. James Wyatt Whitehead V Avatar
    James Wyatt Whitehead V

    Southern States in Front Royal has a fresh supply of seeds for the Depression garden. They even have seed potatoes. Never too early to get prepped and plant by March. This old timer knows how to get by. And he is not pickling bitcoins either.
    https://www.youtube.com/watch?v=Zc-0sUcrckY

  7. novalad Avatar
    novalad

    “By all means, let’s make it easier for small, unsophisticated investors to speculate in highly inflated and volatile cryptocurrencies!”

    It’s one thing to lament speculation in the abstract, and quite another to do so under the current system. It works by manipulating interest rates to increase asset prices. For many decades, the Fed manipulated only short-term interest rates, and let the “bond vigilantes” set long-term interest rates.

    Now, the Fed buys $120B of Treasuries a month, setting the 10-year risk-free discount rate below 1%. The price of a capital asset is a function of this number. If the rate is 0, the present value of a constant and permanent revenue stream is infinite. Managing interest rates means manipulating the price of capital. So there is nothing remotely “natural” about the perpetual rise of the stock market and the housing market. Cut off the heroin-steroid drip, and you’ll see what these assets are really “worth.”

    We barely have any idea how we got here. We have no idea at all how to get back. In fact, we suspect it’s impossible — which it is. Saying that retail investors in their moms’ basements should be denied the speculative franchise because it’s, I don’t know, gauche or something entirely misses the point. This is Uncle Sam’s Casino Economy — you can’t win if you don’t play, but we’re all losing in the long run.

    1. Nancy_Naive Avatar
      Nancy_Naive

      I blame State lotteries. The problem I have right now is deciding when to take profits and build the cash reserves. With the cash rolling out of DC and near zip interest, cash holding is a tad risky too. No good parking places.

      1. novalad Avatar
        novalad

        The fact that a passel of institutional investors are getting into BTC tells me that either our mature, steady-handed financial institutions actually don’t know anything and are getting FOMO’ed; or else they do know something and it’s a reasonable hedge. Or, nobody knows a thing and we’re all just doing what Wall Street Bets did before Gamestop: following the inflows.

        Not to be BR’s “Dan”, but crypto is a decent place to put your money into. I’m not just talking the currencies themselves, but the infrastructure necessary to operate a decentralized financial system. Use cases like NFC P2P hardware or a global payments architecture that routes via satellite uplink (think Starlink or Project Kuiper) have incredible upside for folks in the developing world; I’m thinking of situations like Venezuela, Argentina, and ZA in particular. Currency speculation is one thing, but building out the infrastructure to make crypto payments tractable is quite another. Don’t own the gold mine, own the railroad. To that end — smallsats, spaceflight, offshore rackspace, and maritime LNG (for the literally offshore rackspace in our future) are all investment opportunities to investigate if you’re of the “things fall apart, the center cannot hold” persuasion.

        Alternatively, bulletsbeans’n’bandaids.

  8. Eric the Half a Troll Avatar
    Eric the Half a Troll

    “The next COVID-19 relief bill will inject another $1.9 trillion into an economy that is growing and needs no more economic stimulus.”

    Wasn’t that the same situation we were in when Republican force fed their tax cut for the rich on us saying we needed more monetary stimulation…???

    1. James A. Bacon Avatar
      James A. Bacon

      Yes… other than the fact that you mischaracterize the logic behind the tax cuts. But, if your larger point is that Republicans share the blame for runaway deficits, you are correct.

  9. CrazyJD Avatar
    CrazyJD

    Not to put too fine a point on it, but you made similar arguments in Boomergeddon. I have a slightly different take.

    In the past we have relied on growth in the growth sectors to keep debt as a percentage of GDP at bay. There is no reason to think that this growth won’t continue. If you look at the free cash flow of some of these companies, you come to understand why their shares trade at such high P-E ratios. By any rational measure, they are now overpriced. But I continue to believe that the money to be made by these companies will continue to grow, sometimes exponentially versus traditionally capitalized companies.
    Think of it this way: If the capital of a company goes down the elevator and out the door at 5:00pm, so to speak, you are very probably looking at a winner.

    The losers in this deal are wonderfully portrayed in Kurt Vonnegut’s 1957 novel Player Piano. You could look it up. We are rapidly approaching that status. The current administration’s policies will hasten the day.

    1. James A. Bacon Avatar
      James A. Bacon

      Federal tax policy has boosted free tax flow by cutting corporate taxes. Federal monetary policy has boosted free tax flow by flooding the market with cheap debt, allowing corporations to substitute cheap debt for expensive equity. Corporate America is more highly leveraged than ever. That’s great when the economy is growing, not so great when it’s shrinking.

      Biden & Co. is not likely to cut corporate taxes. More likely, they will increase corporate taxes.

      The Fed likely will do everything within its power to avoid raising interest rates, but now that interest rates are near zero, the Fed has little power to cut them…. unless interest rates turn negative on an inflation-adjusted basis. But that implies inflation. And you’re old enough to remember what happened to the economy in the 1970s. I’d say that 70s-era “stagflation” is the optimistic scenario.

  10. LarrytheG Avatar
    LarrytheG

    More than a few economists now are agreeing with the idea that as long as you grow – you can keep up with the deficits and interest – and so far – T-notes don’t have to pay much interest at all to attract no shortage of buyers.

    I had always understand that we use stimulus when the economy is hurt and then pay back the debt when the economy recovers. Of course no one, really wants to pay it back if it’s their increased taxes that do it.

  11. Nancy_Naive Avatar
    Nancy_Naive

    I’ll go for Door #3. But, wouldn’t surprise me to see the market lose this year; it’s oversold. It happens. Remember, the sample mean for 70 years of S&P500 is ~+7% with a standard deviation of 15%.

    Pickers market.

    1. Nancy_Naive Avatar
      Nancy_Naive

      Overvalued! Bleah! Horrible night. If you’ve never had a twitch in your ear…

  12. JRegimbal Avatar
    JRegimbal

    Read this article from Barron’s carefully. It makes me more optimistic than most. Yes, federal debt is out of control, and the latest $1.9 trillion plan is wildly excessive, but U.S businesses and citizens as a whole have been pretty frugal throughout the pandemic.

    https://www.barrons.com/articles/2021-could-kick-off-a-new-era-of-prosperity-but-first-there-will-be-some-bumps-51608329701?mod=past_editions

    1. James A. Bacon Avatar
      James A. Bacon

      The Barron’s author makes some valid points. Let’s see what he has to say when the bubble bursts.

  13. James Wyatt Whitehead V Avatar
    James Wyatt Whitehead V

    Southern States in Front Royal has a fresh supply of seeds for the Depression garden. They even have seed potatoes. Never too early to get prepped and plant by March. This old timer knows how to get by. And he is not pickling bitcoins either.
    https://www.youtube.com/watch?v=Zc-0sUcrckY

  14. novalad Avatar
    novalad

    “By all means, let’s make it easier for small, unsophisticated investors to speculate in highly inflated and volatile cryptocurrencies!”

    It’s one thing to lament speculation in the abstract, and quite another to do so under the current system. It works by manipulating interest rates to increase asset prices. For many decades, the Fed manipulated only short-term interest rates, and let the “bond vigilantes” set long-term interest rates.

    Now, the Fed buys $120B of Treasuries a month, setting the 10-year risk-free discount rate below 1%. The price of a capital asset is a function of this number. If the rate is 0, the present value of a constant and permanent revenue stream is infinite. Managing interest rates means manipulating the price of capital. So there is nothing remotely “natural” about the perpetual rise of the stock market and the housing market. Cut off the heroin-steroid drip, and you’ll see what these assets are really “worth.”

    We barely have any idea how we got here. We have no idea at all how to get back. In fact, we suspect it’s impossible — which it is. Saying that retail investors in their moms’ basements should be denied the speculative franchise because it’s, I don’t know, gauche or something entirely misses the point. This is Uncle Sam’s Casino Economy — you can’t win if you don’t play, but we’re all losing in the long run.

    1. Nancy_Naive Avatar
      Nancy_Naive

      I blame State lotteries. The problem I have right now is deciding when to take profits and build the cash reserves. With the cash rolling out of DC and near zip interest, cash holding is a tad risky too. No good parking places.

      1. novalad Avatar
        novalad

        The fact that a passel of institutional investors are getting into BTC tells me that either our mature, steady-handed financial institutions actually don’t know anything and are getting FOMO’ed; or else they do know something and it’s a reasonable hedge. Or, nobody knows a thing and we’re all just doing what Wall Street Bets did before Gamestop: following the inflows.

        Not to be BR’s “Dan”, but crypto is a decent place to put your money into. I’m not just talking the currencies themselves, but the infrastructure necessary to operate a decentralized financial system. Use cases like NFC P2P hardware or a global payments architecture that routes via satellite uplink (think Starlink or Project Kuiper) have incredible upside for folks in the developing world; I’m thinking of situations like Venezuela, Argentina, and ZA in particular. Currency speculation is one thing, but building out the infrastructure to make crypto payments tractable is quite another. Don’t own the gold mine, own the railroad. To that end — smallsats, spaceflight, offshore rackspace, and maritime LNG (for the literally offshore rackspace in our future) are all investment opportunities to investigate if you’re of the “things fall apart, the center cannot hold” persuasion.

        Alternatively, bulletsbeans’n’bandaids.

        1. Nancy_Naive Avatar
          Nancy_Naive

          What? No Bibles and Beanie Babies?

          Well, there’s always real estate, which is hotter than a $2 pistol right now. Put a sign on the lawn today and you’ll be homeless tomorrow.

          1. novalad Avatar
            novalad

            My dad is forever kicking himself for not trying to keep the farm on the Boise River in the family for longer. A great-uncle sold it in the 1990s; it’s now in the direct path of Californicated housing developments.

        2. Nancy_Naive Avatar
          Nancy_Naive

          I’m kicking myself for not buying property I was looking at in August!

  15. Publius Avatar
    Publius

    Did you mean to leave out the stinking, rotting corpse of an education system? Or would that have been piling on?

  16. Publius Avatar
    Publius

    Did you mean to leave out the stinking, rotting corpse of an education system? Or would that have been piling on?

  17. Nancy_Naive Avatar
    Nancy_Naive

    https://m.youtube.com/watch?v=g6iDZspbRMg

  18. Nancy_Naive Avatar
    Nancy_Naive

    https://m.youtube.com/watch?v=g6iDZspbRMg

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