Bubbles Always Pop

20 Feb

Bubbles Always Pop

We don’t know who first said that the stock market is a bubble in search of a pin, but it’s an image that is both vivid and true.

It would be easy to excuse missing the current stock market bubble, if we hadn’t already suffered the popping of the dot.com bubble and the housing bubble in just the last 20 years.  When the dot.com bubble burst the Nasdaq lost 80 percent of its value.  When the housing bubble found its pin, millions of Americans lost their homes.

The current stock market bubble is sustained by the following beliefs:

  • The coronavirus doesn’t matter.
  • An economic slowdown in unlikely.
  • Deficits don’t matter.
  • The national debt doesn’t matter.
  • The Federal can really control interest rates.

Yet any one of those things can be the pin the bubble is in search of.   

Indeed, there are more pins than those.  In a new article, the popular economist Nouriel Roubini identifies geopolitical pins among the others.  

He writes that the markets are “blissfully in denial of the many predictable global crises that could come to a head this year.”  

“For starters, the United States is locked in an escalating strategic rivalry with at least four implicitly aligned revisionist powers: China, Russia, Iran, and North Korea.”

“As of early 2020,” says Roubini, “this is where we stand: the US and Iran have already had a military confrontation that will likely soon escalate; China is in the grip of a viral outbreak that could become a global pandemic; cyberwarfare is ongoing; major holders of US Treasuries are pursuing diversification strategies; the Democratic presidential primary is exposing rifts in the opposition to Trump and already casting doubt on vote-counting processes; rivalries between the US and four revisionist powers are escalating.”

Another observer, Charles Hugh Smith, addresses the topic of bubbles on his Of Two Minds blog.  His post The Fed Has Created a Monster Bubble It Can No Longer Ignore is worth reading.  

We’ll share two important points Smith makes:

“History has never recorded a bubble which settled magically onto a ‘permanently high plateau’ and stayed there for months or years.  So the Fed has finally reached the point of no return: either it accepts a painful bursting of the monster moral-hazard bubble it has created or it lets the monster lead the stampede over the cliff to a financial collapse that the Fed can’t rescue with the usual tools of lowering interest rates and bailing out banks.”


“The problem is that bubbles always pop, and they pop regardless of what central banks do. This is contrary to the popular opinion that if only the Fed had saved Lehman Brothers, the Global Financial Meltdown of 2008 would never have happened.”

If you’d like a little more detail about the Fed’s role in creating bubbles, see our post Do You Really Think This Can End Well?  In it we wrote, “What we are saying is simply this:  The stock market is a bubble of enormous proportions.  The Fed will try to keep it inflated, but eventually it will fail.  Eventually rates will rise.”

“And as always, the bigger the bubble, the bigger the bust.

“That’s just one reason why you should own gold.”

Contact Republic Monetary Exchange today to learn how to protect yourself and your wealth before the bubble finds its pin.