Markets are in a precarious state, teetering on the edge of what many are calling a “super bubble.” Paul Kiker and I delve into the nature of bubbles, the psychological and economic factors driving them, and the potential consequences of their inevitable burst. We explored the role of AI, the impact of central bank policies, and the broader implications for the average investor. The conversation highlighted the importance of understanding market dynamics and preparing for potential downturns.
Understanding Bubbles
A bubble, as Paul defines it, is an overvaluation that leads to euphoria and delusion, a psychological diversion from reality. We discussed the stages of a bubble, from the stealth phase to the mania phase, and how current market conditions mirror past bubbles, such as the 1929 crash. The sentiment that “this time is different” is a recurring theme, often preceding a market correction.
The Role of AI
AI is being touted as a potential savior for the economy, but its real impact is more nuanced. While AI can enhance corporate profits by reducing the need for human labor, it also poses deflationary risks by potentially eliminating jobs. The balance between technological advancement and economic stability is delicate, and the implications of AI’s integration into the workforce are still unfolding.
Central Bank Policies
The actions of central banks, particularly the Federal Reserve, have created a massive debt bubble. With $36 trillion in U.S. government debt, the Fed’s strategy of printing money to sustain the economy is unsustainable in the long term. This approach has led to inflated asset prices, creating a precarious situation where any market downturn could have severe consequences.
Key Data
The U.S. government now has $36 trillion in debt.
AI unicorn startups employ about 50% fewer people than non-AI startups.
Household debt is at an all-time high, with credit card debt surpassing $1 trillion.
Predictions
We may see a deflationary market decline followed by an inflationary phase.
The U.S. could experience a prolonged period of economic stagnation similar to Japan’s post-bubble era.
Implications
AI’s integration into the workforce could lead to significant job losses and wage stagnation.
Current market conditions suggest a potential for a severe economic downturn.
Recommendations
Consider diversifying your investments and reducing debt to prepare for potential market volatility.
Build an emergency fund to increase financial resilience.
Explore multiple streams of income to mitigate economic risks.
Thanks Chris & Paul. A couple comments on your education theme:
Re education, I taught for 30 years in a little weekend test prep and enrichment school with virtually no administration and absolutely no silly paperwork. Our job was to get the kids to master useful skills and that was it. If the kids learned, the kids were happy and the parents were happy. No job protection, no bennies, no pension, nothing like that. If you taught well, you were back next week; if you were no good, you were booted out by lunchtime and it was see ya wouldn’t want to be ya. There was a simple purity to the job that I appreciated and of course it was highly unusual, almost 19th century in its stark precariousness, but it was a better teaching and learning experience than many other places out there. Too many schools have become little other than wildly expensive daycare and indoctrination centers that do more harm than good.
If vigilant parents can homeschool with like-minded families, that’s almost always a much cleaner and more vigorous choice. Homeschool, church, master/apprentice; play, sports, exploration, fluency with physical tools and instruments; libraries, online lectures, working the soil – these would likely yield more than a dozen conventional schools without the neuroses and addictions.
In recent years, the most sane and good-humored people I meet are tradesmen working their own business out of vans; the most out of touch and unhappy are lost in the Neverland of abstraction chomping on one blue pill after another.
Re AI, there may be a legitimate place for it as a tool, but we know that people will take shortcuts whenever possible, and it’s simple to predict that students (and adults) who already can’t write (or think) very well will have even less skill if they don’t have to labor through essays or graphs or presentations themselves. By writing we learn to think. Routinely take the AI shortcut and we will have generations coming up who won’t be able to think at all. These will rely on AI for everything, similar to how the calculator eroded everyday math skills and GPS has made people increasingly clueless about the layouts of even their own home towns.
Re AI’s erosion of critical thinking, we’re already seeing how the Censorship Industrial Complex shuts down “misinformation” and “conspiracy theories” identified by “authorities” and “trusted sources” – and though PP and other places are dedicated to decoding and mocking the official BS, the day will soon come when most people will have insufficient skills to even see they are being duped and no ability to challenge and defrock the Wizard of Oz. That’s when things can tilt Full Orwell Forever – or just until entropy and energy failure save us by starving the grid and servers. But such a society, having fallen from the 12th or 24th rung, will still be in mighty big trouble.
This is my third market cycle in Crypto and it looks like we are heading towards another top there also.
The current Crypto bull market is about 40 days into our alt season, which is typically the euphoric end of our bull market.
The last three alt seasons have lasted between 90-120 days. We had two alt seasons in 2017 and a muted one in May of 2021, with a “non alt season” ending in November 2021.
So, with that history, it looks like our alt season and bull market in crypto could be over sometime between January and March of 2025.
They tend to also have some pretty bullish narratives towards the top also, last time it was Musk, this time it’s Musk and politicians.
We usually see a downturn in the larger markets about a month after the top of the Crypto market.
Could be something to add to your watchlist of indicators.
How are they going to settle that millions came to look for work while already millions young people struggle to even get job at McD…
in 70s were all kinds of “hippie” and other groups, mostly coz they had to spend time somehow. Foreign cartels are already operating on US soil so they get recruiting boom possibly.
AI is much worse as there basicly only government jobs left. Previously offshoring meant manufacturing. Now it is office jobs that were left from manufacturing moving out.
What young people nowadays tend to do, is smoke something when not at job. That can introduce them to get connected with drug gangs.
@39:35 equity markets outperforming everything else gave me tulip superbubble vibe considering what they talked previously that equity market is just arbitrary number, not reflection of real world.
That scenario of dollar strengthening, then printing, then dollar value collapse and capital flight elsewhere is plausible and follow japanese trajectory. Just key point here is banking sector doesnt want to or isnt able to adjust to shrinking economy. Thus they will hold whole society, country hostage and gaslight people to continue business as usual.
teetering on the edge of what many are calling a “super bubble.”
Agree with this name for two reasons - one you gave - and the other because a lot of it is being driven by “super”-annuation.
When superannuation was introduced in Oz it was meant to provide for your retirement, so you now had to do you own saving. Previously we paid taxes, and if the less well off needed a bit of cash, there was a pension.
However this super thing is just another tax. Companies pay about a third of taxation into super. And it is treated just like other taxes. Companies try to avoid paying it, and the Govt tries to enforce it.
The other thing that super was meant to do was contribute towards infrastructure for govt services.
However what happened, instead of giving loans, the super companies took ownership. And because they were unable to borrow (narrative only) they had us (through Govt) borrow, and so our kids are left with debt while us older ones have a improving retirement fund - One that we must make big enough to last us till we are ninety - so we are told.
Not everyone cracks that number. So the legal ponzi scheme that is meant to payout in retirement or death is awash in money - it’s bringing twice as much as its paying out.
Maybe people are living shorter lives? Then then they pay out less.
And if/when the market crashes all the superannuants are exposed.
And our super companies are using ownership to control boards, and this is not always working well. Super funds are about return. The companies they are buying are about service. A measurement of service usually isn’t the return to the CEO.
For mine, I would change the rules of Super Funds. I would legislate that they could only take up Preference Shares in other companies (in effect a profit sharing loan - no voting rights). This gives slightly better return in a disaster, and it stops fund managers taking over service companies that are principally in monopoly situations, or have in-elastic returns (energy).
So in essence that up and to the right thing is two but maybe three things - Feds printing, super fund taxes (twice what they need to be) and the resultant inflation coming back in (a sort of feed back gain). A dollar now is not what it used to be.
One other thing. “Depose” has a couple of meanings. I still think this was a signal.
If we thought of the markets as a ponzi scheme with AI/computers and printed money, the market can stay up until big investors want their capital. News lately of some big investor who bought bitcoin less than a dollar tried to sell and pay his taxes and move abroad. They want to put him in prison for selling? Yes and no. With a ponzi scheme there is no money to give him to sell his appreciated bitcoin. That is his crime not knowing that the crooks, including corporate buy backs, are running the scam.
It is the same thing going on in the indexes, a ponzi scheme where no big player can sell, unless planed like Buffett of Elon on an upswing, not the bitcoin investor who is not in the club. We are past any logic, facts, or common sense. How long can it last? We can have a large correction and still be in an up trend.
10:05 - Any time anyone needs money the Fed just prints it up
Ummm… No. That should read “Any time the banks get in trouble or any time the FedGov needs money for its reckless and onerous programs, THEN the Fed just prints it up.”
10:17 - For anyone who doesn’t know they used to say we have a fractional reserve banking system. That has not been true since March 26, 2020, when the Federal Reserve dropped the reserve requirement to zero.
Interesting point. I recently wanted to open a new account at my local bank. A savings account at this bank pays 0.02% interest! A 3-year CD pays 2% interest! In other words, the bank doesn’t need my money. There’s no reserve requirement so they could care less whether they have deposits or not! So the net result of the Fed’s money printing and reserve requirements is the money boys are up 28% on the SPX this year. Not that we should be surprised. The role of the Fed – despite what they say – is to promote the interests of its member banks, and what better way to do that than by enabling government deficit spending? After all, banks are fueled by debt, and there’s no greater debtor on earth than the US FedGov. Added bonus! – the American taxpayer is on the hook for that debt, so the poor schmucks making 0.02% on their savings are being saddled with $38 trillion debt while the big boys are pulling down 28%. Man, is this a great country or what?
18:25 - I’m stuck again and I maybe I’m just, I don’t get it.
How can you not get it? This time is different. Investors have realized that the Fed and the FedGov will absolutely not allow another 2008-style event. They have clearly decided, in the words of Ludwig von Mises, that the crisis shall come later as a “final and total catastrophe of the currency system involved” rather than “sooner as the result of voluntary abandonment of further credit expansion.” Perhaps things will change under the new administration, but my guess is we have passed the point of no return, especially since the next administration will be limited to 4 years. Every major investor out there knows this and is mentally computing a likely time frame in which to continue dancing while the music is playing, while in the meantime quietly converting some of that “wealth” into real estate, fine art, viable businesses, and other assets that will hold their value when the currency crisis arrives. Anyone who is not on board with this will see their holdings evaporate, and anyone who is still dancing when the music stops will be slaughtered.
