In 1982 the artist formally known as Prince released a popular party anthem
called "1999". The song was a premonition that 1999 would be a year we would
all aspire to "party like". It was obvious that Prince was making reference
to the excitement associated with ringing in a new century. However, unbeknownst
to him, the accommodative policies of the Federal Reserve would lead to a festal
bubble in NASDAQ stocks, making his call to party in 1999 that much more appropriate.
After that hangover lapsed, our central bank--in full cooperation with the
Wall Street casino--was once again donning party hats by the mid-2000s. The
Fed's cheap money, along with the private banks' proclivity to create credit,
produced similar merriment in the housing market. The fallout after this party
ended was much more severe than the previous monetary orgy.
Today, even as most Americans are still suffering the ill effects brought
forth by all the aforementioned partying, the festivities on Wall Street's
trading floors have reached its apogee. Although GDP growth has remained below
trend for years and household incomes have stagnated, the corrupt carnival
barkers that dominate the financial services industry have caused investors
to party like its 1999 and 2007...combined.
Last year venture capital investments reached a level that was last seen during
the dotcom bubble, as they poured a staggering $48.3 billion into startup companies.
One of those companies, Pinterest Inc., recently announced they were looking
to raise $500 million in a new round of funding, which will double the company's
valuation to a hefty $11 billion. That's a frothy valuation for an on-line
scrapbook. But there is no room for the process of honest price discovery in
an environment where money is free and failure has been annulled. And, if you
are ever invited to one of these gluttonous venture capitalist galas, and are
looking for a ride, check out Uber Technologies, an internet car service company
valued at a whopping $41 billion dollars.
Today's festivities span well beyond the 1999 internet startup theme. Those
who missed their invite to the NASDAQ bubble and the real estate flipping bash,
will be happy to learn subprime lending is back to its profligate peaks. Loans
to consumers with low credit scores have reached the highest level since the
start of the financial crisis. In fact, almost four out of every ten loans
for autos, credit cards and personal borrowings in the U.S. went to subprime
customers during the first 11 months of 2014. That amounted to more than 50
million consumer loans and credit cards totaling more than $189 billion, the
highest levels since 2007.
But as Wall Street resumes its gaiety, Main Street is still mired in despair.
According to a newly releasedreport from
Bankrate, 24 percent of Americans have more credit card debt than emergency
savings. And 13 percent of consumers don't have any credit card debt; but,
they don't have any savings either.
The jobs picture, which is paraded by Wall Street and government as the one
bright spot in an otherwise lackluster recovery, just isn't as rosy as it appears
at first glance. According to the Federal Reserve Bank of Atlanta, "The economy
has been generating full-time general-service jobs at a much slower pace than
in the past." In fact, the economy has 2.5 million more part-time workers and
2.2 million fewer full-time workers than it did at the start of the Great Recession
in December of 2007.
Despite what the MSM would have you believe, the economy is more fragile today
than at any other time in the past. The virtually free money and QEs provided
by many global central banks have caused economies to pile on an additional
$60 trillion of debt on top of the already unsustainable and insolvent conditions
that existed in 2007.
Sadly, the mindset of governments and central banks remain unchanged from
the collapse of the previous two bubbles. Unprecedented money printing and
artificially-produced low interest rates have created a perpetual happy hour.
And it's placed all of us at the precipice of a collapse in equities and real
estate prices once again.
Naysayers will point to the six-year stock rally as evidence that all is well.
And are also quick to point out that record-low bond yields illustrate that
investors have complete confidence in sovereign nations to service and pay
off their debt. But these are not the results of the free market price discovery
process at work. Rather, it is merely the ability of central banks to use the
availability of free money to artificially and massively inflate asset prices.
Another reason for today's complacency is the widespread belief that banks
are now properly capitalized--unlike the condition experienced at the start
of the Great Recession. U.S. banks, once loaded with insolvent mortgage securities,
are now thought to "safely" hold over $4 trillion worth of Treasury, Agency
and Mortgage Backed Securities. And, thanks to Basel III and the Dodd Frank
legislation, these banks have $2 trillion worth of Treasuries that carry a
zero-risk weighting in their capital ratios.
Therefore, these banks only appear to be well capitalized. Once the sovereign
debt bubble bursts and investors dump their bond fund holdings, interest rates
will soar. Banks will then become capital constrained and will once again be
forced to hold illiquid assets that cannot be sold without destroying their
balance sheets. In addition, rising interest rates will put a severe strain
on the global economy, which is now saturated with a record amount of debt
in relation to total output.
Unless you believe the global economy has entered into a multi-decade recession
like Japan, interest rates have nowhere to go but up; dramatically. The problem
is that debt levels are at all-time highs. Once the cost of money rises this
part-time working, no savings, asset-bubble driven and debt-laden economy will
collapse. And, the next time the wheels fall off Wall Street's party bus, the
crash will be more severe than 1999 and 2007...combined.
