Bubbles Are Brutal

Asset bubbles are brutal.

The most difficult time to remain centered and focused is during their last stages as everyone around you is going nuts. Logic has been tossed out the window, sentiment is manic, and every narrative – the stories we hear and use to make sense of our world – is thoroughly ungrounded.

After a decade of price deformation – such as UBER being valued by the ““markets”” at $45 to $50 billion despite having no viable path for ever making a profit – it seems that practically everyone has lost the ability to perform even basic math or reality checks.

For example, this week – for what must have been the 42nd time – the Trump administration has proclaimed a massive victory in the China Trade Deal.

The narrative being sold to us is that along with the immediate roll-back of tariffs (which is Trump caving, not ‘winning’), China will buy $50 billion of US agricultural products in 2020.

Huge excitement in the global equity markets has greeted this news. Stocks exploded higher and bonds have been sold off. Unleash the hounds of economic growth!!

All this based on the premise that China has (verbally) agreed to buy $50 billion of US agriculture products in 2020.

Now, about that…

What does $50 billion a year in Ag trade look like? Is it even possible?

The all-time record of China buying Ag products happens to have been in 2012 when:

  1. Ag products cost a lot more on a unit basis (this was the food inflation which you may remember kicked off the Arab spring riots in 2011?) and
  2. China hadn’t yet formed solid trade relations with other Ag producers such as Brazil and Russia.
What was that all-time record? It was just $26 billion.

But now, suddenly China is going to double that amount? In a single year?

After securing and formalizing huge trade deals with Russia and Brazil? After being so dissed during the trade negotiations that China’s press and ministers openly criticize the arrogance and hostility of the US?

Yeah, that’s not very likely at all, is my assessment. China is not going to stiff its new trade partners just to make Trump happy.

More than that, it’s also unlikely that China could even find a way to spend that much on US products:

The entire US Ag export market was $140 billion in 2018. For China to suddenly become $50 billion of that would be rather disruptive to say the least.

The black bar I’ve drawn on the above graph represent $50 billion of goods. If China were to become that large of a consumer, it would displace the equivalent of 100% of its current consumption, plus that of Mexico, the EU and most of Japan.

Yeah, that’s just not going to happen.

This is just so completely brain-dead obvious that I’m surprised it went completely unnoticed by the entire US financial press.

Though I shouldn’t be, because the tail end of a massive bubble comes with a near-complete loss of the masses’ ability to think or reason.

Of course, we humans have been here many times before:

Today, the herd has gone mad. So much so that it can’t recognize the simple math that “$50 billion” in annual Ag purchases is simply not realistic.

I have a lot of compassion for just how difficult it is to keep one’s sense during a massive bubble, especially during the one we’re in now. Because today’s bubble isn’t just a product of the magnificently dumb one the Federal Reserve/ECB,/BOJ/et al., have been blowing since 2008.

Rather, its origin starts back on August 15th, 1971 and it is rooted in a most ‘mad’ idea: that one can grow one’s debts faster than one’s income forever, Hey hosanna, Amen.

This is such a flawed concept that it annoys me to have to re-re-re-explain it to the shepherds overseeing the mad herd.

Expensively educated ‘professionals’ will very earnestly try to explain to me that this is both a stable and good system, when it’s clear the math doesn’t work.

The only way you could possibly defend the above chart, mathematically, is in a world without any limits. As long as exponential growth can continue unchecked – forever – then the debt trajectory of the above chart can be maintained.

But in the world we live in, like it or not, limits exist. And our debt is fast becoming a black hole whose inescapable event horizon approaches nearer all the time.

Yet at the political and institutional levels, “growth forever” is the only narrative. Even as it’s becoming increasingly clear that sustainable growth is proving more and more elusive. And the increasingly desperate efforts to pursue it are creating long-term damage to our future prospects (worsening unaffordability, wealth inequality, environmental destruction, geo-political pressures, etc.)

The effect of that? More and more people are losing trust in the system.

And in a faith-based system of money, as all fiat currencies today operate in, trust is the single most important commodity. Once it’s gone, it’s gone.


The trade deal is simply this week's inane excuse for why the ““markets”” have been blasting higher.

The real reason has nothing to do with trade. Or with anything fundamental at all.

It’s all about central bank money printing.

The Fed is now in full emergency mode. Its December money printing is truly a work of pure desperation. Hundreds and hundreds of billions poured into the system to prevent a crisis:

Though the Fed isn’t fessing up here. It’s not even yet admitting there’s a problem to be concerned about.

But its actions belie its desperation. And whatever’s going on behind the scenes is none of the truly ridiculous explanations they’ve offered so far.

It’s utterly, completely, totally ludicrous to suggest (as Powell did) that the banking system is suffering from a shortage of excess reserves. Puh-leeze!

At $1,388 billion, excess bank reserves are $1,358 billion more than they were before the Great Financial Crisis hit. $30 billion was enough a decade ago, but now 46x more than that is supposed to be insufficient??

So, that ain’t it.

Instead when banks won’t lend to each other overnight it’s because they don’t trust each other enough to do it.

That’s it. Full stop.

Which means the Fed know something we don’t. And it means Powell is a lying sack for suggesting otherwise.

And it means this whole thing could go 2008 nuclear at any time, and the system won’t be able to control the meltdown.

Which is why the Fed is fighting like crazy to prevent that sort of thing from ever getting started.

So here we find ourselves, at the twilight of the Everything Bubble, with asset prices at all-time highs and the mainstream narrative crooning that the future’s so bright we need darker sunglasses.

Yet paradoxically in parallel with that, a cursory peek behind the curtain and a little cocktail-napkin math show us that the entire financial, economic and monetary system is teetering on the brink. In the Fed’s latest half-$trillion liquidity dump, we can see how radically extreme the measures now need to be to keep things from falling apart.

Bottom line: This whole thing is going to blow up at some point. It will be a before-and-after story for the generations that follow, in the same way the Great Depression was.

You’ll either be emotionally, physically and financially ready for it or you’ll become collateral damage along with the rest of the herd.

In Part 2: Take Action Locally To These Global Threats, we make it clear that all is not lost; you likely have more agency to protect yourself than you realize – and to position wisely to prosper – from the unfolding collapse if you commit to taking smart action now.

I myself have ramped up my plans to an even greater extent that I had before the 2008 crisis. In Part 2 I share the big step I’ve just taken in my own life to prepare for what’s coming, and I encourage you to get busy following suit with your own preps.

Bubbles are brutal. As John Hussman wisely quips, they force us to decide to either “look like an idiot before the crash, or look like an idiot after it”.

Break from the herd, no matter how awkward it may feel, and secure your future. Don’t be one of the countless idiots who ignore the warnings.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access).

This is a companion discussion topic for the original entry at https://peakprosperity.com/bubbles-are-brutal/

Chris -
Thank you tons for this information framing how to think about today’s news regarding the China “deal.” I have no time to be digging into this matter, but knew that it was important one way or another – for its idiocy, as it turns out.
Great service.

Thank you tons for this information framing how to think about today’s news regarding the China “deal.” I have no time to be digging into this matter, but knew that it was important one way or another — for its idiocy, as it turns out. Great service.
You are most welcome, thanks for the feedback. I'll be here all week! :) Now, to really drive the point home that "the Trade Deal" is just a cover story for something else let me begin by asking this; how would a trade deal greatly improve corporate profits or economic growth? This question is never addressed. It's always presented by the media as a slam-dunk, foregone conclusion. And why not? After all stocks explode higher every time there's a trade deal headline so it must be so, right? It simply must be true that a trade deal would be good for companies' bottom lines. The exploding stock prices say so. But let me ask it again. What, specifically, happens to company profits when a trade deal is reached? Are auto makers going to do better? How do US small cap companies benefit? What about US health insurance companies? I cannot answer any of those question with any specifics at all. I am thoroughly stumped. So is everybody I've asked. It's like we've all jumped straight to the conclusion ("of course a trade deal is unambiguously positive for stocks!") without having gone through the proof. Alternatively, we might look at this next chart and conclude "it's the liquidity stupid!" Maybe correlation isn't causation, but that's a pretty compelling chart, no? You'd think at least one or two column inches might be dedicated to the possibility that stock prices aren't signalling anything specific about global economic prospects generally or corporate profits specifically, but instead are signalling that the central banks are printing like mad. But, no. No articles. None at all in the mainstream press. Neither are any 'journalists' asking Powell at his press conferences just exactly what wealth gap the Fed is targeting. How much is too much? Or how much punishment savers and pensions are expected to shoulder in order to secure another quarter of excellent bank profits? Or a dozen other questions that might connect Fed actions with social consequences. Those might as well be songbirds flying straight into a nailed shut Overton window. Nope. 100% of the financial press is perfectly happy promoting the illusion that stock prices are telegraphing that things are fine and getting better. This all carries on until that illusion breaks down, almost certainly rather dramatically if not suddenly and violently given the enormity of the deformations involved. This is where Part II of this report comes in. I'm taking action to move towards greater resilience. Maybe I'm the one who's nuts here, or maybe it's the Fed, the press and the politicians. That remains to be seen, but I've got a ton of data saying that it's them.

Belief Perseverance. It’s a hard psychological phenomenon to counter, especially when those who benefit from status quo narratives control most of the press/media. It seems to matter not what evidence/data is presented, people cling to and accept most of what our ‘leaders’ proclaim. It seems self-evident that infinite growth is not possible on a finite planet with hard biophysical limits, but when we are repeatedly told that it is possible the vast majority accept it without question. While the economic/everything bubble is likely to implode first, it is when the carbon bubble bursts that things will really get interesting…

Lots of people believe that technology will allow us to keep growing and decouple us from physical limits. The recent development of electric cars and the more widespread adoption of solar panels on roofs affirms this in their minds. Genetic engineering will allow agriculture to produce more and more food using less resources. These innovations will continue.
Whether this is all true or not, they dont bother to investigate using objective analysis of the data. They believe it and they’re sticking with it. The elites may even believe this themselves.
They likely accept that infinite growth on a finite planet is not possible but that we’re nowhere near those limits yet. And when we do reach limits we can just fly to new worlds in spaceships. Space X affirms this view. So we can continue trashing this world as we’ll just make a new one.
Done. Narrative developed. Now lets continue pushing the markets higher please.

“Until they become conscious they will never rebel, and until after they have rebelled they cannot become conscious.” -George Orwell, 1984
Great article, Chris. Agree that the “cocktail napkin math” hasn’t added up for a very long time. This has truly been an epic experience. We knew that the Fed would continue to kick the can down the road (QE + lower rates = their only move these days), but the bubble has gone beyond what we thought possible in terms of size and duration (though nothing surprises us anymore). We assume that their balance sheet will quickly eclipse the $4.5T it peaked at and won’t be surprised to see it hit $20T within a decade. It has been painful to watch; markets and price discovery are truly broken now, all that is left seems to be a casino of speculation.
Thanks for your content. It is nice to know we aren’t alone in our thinking. We do feel like we are going crazy over here.

Excellent article. I noticed, recently, people are starting to quietly talk about a debt jubilee. That’s basically a game of musical chairs. Who foots the bill that someone else incurred?
We all have our hot buttons about things that are out of control. For me the American Diet is one of the disasters we are ignoring. We are willing to talk about who should pay for the monstrous health care bill, but not willing to ask why the bill is so high.
The amount of per capita meat, dairy and sugar have all more than doubled in the last 50 years. 70% of the people in the US are either overweight or obese. Type 2 diabetes has increased 500% in 50 years. Cardiovascular problems were rare in 1900, but now claim the lives of almost half of our citizens. Four out of every five health care dollars, currently around $2.4 trillion dollars per year, are spent trying to repair diet related damage.
Our current solution is to ban fat shaming, produce overweight mannequins, have overweight runway and swimsuit models. In other words, lets push acceptance of the current situation as normal and get comfortable with it.
However, it’s not normal. As recently as the 1980s, we hadn’t yet supersized ourselves.
I know this is somewhat off topic, when talking about the debt bubble, but not, when talking about disasters that we are pretending are not happening.
Even if we could somehow fix the debt bubble, our current health trajectory, unchecked, will collapse our health care system and health insurance system. I don’t see our economy surviving this one either, even without the debt and energy problems we face.
It’s one of the elephants in the room we are carefully ignoring.

Just like all exponential growth this is skyrocketing (debt and money printing) at the end of the cycle. When it will collapse is anyone’s guess but its a sure “ tell·​tale” sign that the end is very close.
The FeD has just promised $500 billion before year end…its looking more and more like the last gasps are occuring right now!!
See you one the other side! :wink:

Thanks for pointing out the joke that the “phantom” trade deal is. As often as this deal has been declared off again, then on again, then off again it has become laughable. Meanwhile, on our small farm, the best estimate we have is the trade war has cost us over $25,000, while the MFP payments are $8,800. Not a very good outcome, in my book.

For me the American Diet is one of the disasters we are ignoring. I know this is somewhat off topic, when talking about the debt bubble, but not, when talking about disasters that we are pretending are not happening.
I think you are on to something. The debt bubble started in '71 but didn't kick in fully until the mid-'80s, and our waistline bubble started to go crazy then too. Debt & diet are also related in their addictive natures; processed food is flat-out addictive (engineered to be so, with HFCS becoming dominate by '85) and unrestrained spending via debt is highly addictive too. I remember once when a school banned junk foods seeing video of parents pushing french fries through the chain link fence into their kid's mouths, like they were in prison or something. The SAD diet is spreading worldwide like an infectious disease, just like debt. Both are unsustainable, and both are frightening in their growth rate, and both happened on my generation's watch (X).

The Standard American Diet abundantly sustains the profitability of the healthcare, pharmaceutical, and health/life/disability/long term care insurance sectors of our economy, probably one of the few growth areas. It’s sustainable because those using it still keep reproducing and it apparently has minimal effect upon their already prodigious fecundity. It helps keep Social Security viable because those dying young help fund those who make it to retirement age. It’s apparently enjoyable given the glee with which so many indulge in it. It helps impair intellect thereby supporting the consumerist/materialist orientation of a majority of the population, keeping the economic engine of the country running. It makes one fat and listless, thereby serving to suppress, by virtue of their decreased energy, any revolutionary tendencies among those so indulging, thus supporting an elite who, were are told, know better than the masses what is good for them. It may improve the environment since, instead of throwing junk away, we are consuming it or filtering it through our lungs. The possibility even exists that it could even help promote world peace. If we’re all too fat and dumb to fight, they’ll be no wars. Let’s frame SAD in a more positive light and consider the possibilities and opportunities. After all, every cloud has a silver lining.

According to the most recent jobs report which rounds out this decade: In the 2010s the US economy created net 22.4 million jobs. In the 2000s US economy lost net 1 million jobs.
Now I graduated college in 2008 right before GFC. There were tons of jobs with signing bonuses for anyone going into my field. The perks were crazy for anyone willing to do anything extra beyond the minimum. I feel like today its totally the opposite.
Yet, supposedly this was a much better decade for jobs. I know I’m being gas lighted but can’t figure how they get away with it.

“It makes one fat and listless, thereby serving to suppress, by virtue of their decreased energy, any revolutionary tendencies among those so indulging, thus supporting an elite who, were are told, know better than the masses what is good for them.”
I know for a fact that the food, agriculture and pharmaceutical industries are “pulling a Phillip Morris,” regarding nutritional information. Now, you have me wondering if the uber-wealthy are involved in the info blockade as well as the industries who gain from the SAD food addiction, by encouraging the “useless-eaters” to eat.

We mustn’t forget the “feel good” options that are presenting themselves to the masses. As I have mentioned in the past, “follow the money”, if you wish to know the direction of our “dumbed down” society. Maybe we wll all go with a smile on our face!