Reader Asks: Can the Bubbles Last Forever?

Reader Bob wants to know if the Fed can keep various bubbles levitated forever. Here is his specific question followed by my response.

by Mish

Hi Mish,
Thanks for the great website. I read it every day. With the changes in the rules of the Fed from TARP, I have come to question how things will ever change. I believe the Fed will never raise interest rates (of any consequence). I think the Fed will buy assets in any crash in stocks, bonds, real estate, etc.
What if a law required that no real estate be sold for less than 10% of its purchase price? [Mish note: Bob said 10% but I think he means 110%. Alternatively, he does not want homes to sell for more than 110% of the previous sale to stop bubbles. I address both possibilities.]
Is anything wrong with my thinking? Can anything end this? I am an average income guy paying my bills.
Thanks for any insight.
Bob

Attitudes

Can this go on forever? That’s a question I get asked all the time.

Many seem to think so. The same attitude prevailed in 1929, 2000, 2007, and 2017. That’s 3 bubbles in 17 years. Each bubble is of bigger amplitude.

No one thought Japanese stocks could or would fall from 39,000 to 7,000 over 20 years but that happened. Could we see the same in the US? Why not?

Central Banks Omnipotent?

If central banks were omnipotent there would not have been a crash in Japan. If central banks were omnipotent there would not have been a global crash in 2000 or 2007.

Can central banks prevent crashes or declines forever? History says no. Does QE make things any different? Why? Is the Fed going to own everything?

I am sure the Fed will not own everything. Will another round of bond buying ignite the markets again? Why would it?

Market Timing

Yet, I have not provided any insight as to when this ends. I cannot. Nor can anyone else. Conventional wisdom says “you cannot time the market”. Arguably that’s true.

But history also says overpaying for assets will eventually set someone back for years, perhaps decades. Look at Japan. Even in the US there are good times to buy and poor times to buy.

2000 and 2007 were exceptionally poor times to buy in the US. In the US, normalized P/Es suggested 1998, 2005, and 2015 were poor times to buy. The stock market went up anyway, in all three instances.

Those investing in 1998 got two more years of mania. So did those in 2005. So did those in 2015. Might we see two more years of mania? Sure, why not? But history also says it will all be taken back and much more.

Fair market value on the S&P 500 is probably in the range of 1200 to 1400. That’s a long way down.

Don’t Overrule Free Markets

As for your suggestion on real estate, please don’t go there. The distortions would be perverse in unpredictable ways. If rules mandate people must pay more than they believe homes are worth, there will be no sales.

If you mean people could not bid more than 10% above the previous price (to stop bubbles from growing), one of two things might happen

One possibility would be Joe sells to Sue who sells to Mark who sells to Jim in house flipping schemes to drive up prices before the final sale to a “real” buyer.

Another possibility is no sales take place at all as people view their asset as worth more than they can get.

We are in this mess because the Central Bank wizards believe they know where interest rates should be. Three bubbles in 17 years prove central bankers are clueless.

When does the mania end? I don’t know, nor does anyone else. But it will.

Mike “Mish” Shedlock

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