This article is not about sensationalized reports about wildfires nor hot weather.
It is about cars and speculative financial markets, both of which can be exciting as well as at times, dangerous.
When tinkering with old cars it is best not to go near the electrical wires as there is weirdness there. Black ones are cool most of the time. But because the red wires can get hot they are definitely taboo, which is why they are red.
It is not widely understood that a lot of things run on smoke, including electrical wires.
But if you must tinker with an old car, be careful not to let the smoke out. That happens and the engine will not run. Sometimes the smoke will come out of the wires all on its own – same thing – the car won’t run.
A good thing about new cars is that you can’t see the wires. What you can’t see, shouldn’t worry you. So, new cars run forever.
Beyond wires, a Tesla has the additional threat of a thousand-pound battery with lots of lithium. And that smoke is uniquely hazardous.
New participants to the financial markets understand that prices always go up and to never even know there are wires, let alone ever thinking about tinkering with them. Wizards, called economists, who are custodians of the ancient financial theories always boast that nothing can go wrong. Recessions can be prevented by manipulating interest rates and money supply.
People from veteran stock investors to novice day traders need not worry about risk. With threats eliminated, and the Fed controlling things bull markets run forever.
With always outstanding corporate management and the genius of economists, adversity is limited to minor setbacks.
In December 2007, Harvard’s Greg Mankiw boasted that nothing could go wrong. Because the Fed had a “dream team” of economists. Despite the confidence, the worst financial calamity since the 1930s followed.
As the 1929 Bubble was becoming very exciting, John Moody also made the big boast that nothing could go wrong. Because the Fed was “new and scientific”.
You get the picture.
Considering how intense the speculation has become now, when it comes out it won’t be just a puff of white smoke equivalent to signaling the election of a pope.
Fortunately for students of the markets, there are technical measures that are warning that the financial wires are getting very hot. The hottest since the popular manias that climaxed in 2007 and 2000. Financial bubbles, in any century, are dangerous and failure has been signaled by credit markets becoming volatile.
Although unfamiliar with the smoke theory, quite likely the Fed is doing everything it can to keep the smoke from getting out.
To keep the party going!
For how long?
Ironically, there are seriously real wires that central bankers have absolutely no control over. And these are in the credit markets, commodities and the weirdest of weird—the velocity of money.
In so many words how quickly money changes hands.
What “velocity” does is add to credit creation on the way up and to exaggerate credit contractions on the way down.
Effectively pointing out that Fed credit is not needed during a boom and is cancelled out during the contractions. The following from Barron’s in July 1932 is a remarkably clear description of a post-bubble credit contraction:
"The Federal Reserve policy of cheapening credit through the purchase of government bonds has been unable to make a dent in the conservatism of borrower or bank lender, in short, every anti-deflationary effort has yet to provide positive results. The depression is sucking more and more bonds into its vortex."
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Most of the great stock bubbles have clocked a regular timing pattern. This is the year that a great bull market could become hot enough to complete. Since the advent of modern financial markets by 1700, the great stock bubbles have concluded a decade after the climax of a great speculation in commodities.
This review would not have been written if there weren’t signs of excessive speculation (✓) about a decade after the equivalent in commodities (✓). The last big global high in commodity prices was in 2011.
That’s when copper’s real price got so high that druggies were stealing wires from electrical utilities. Shockingly, sometimes getting smoked themselves.
Beyond the warnings providing by financial wires now getting hot, there are some flashing hazard lights.
This year’s rallies in lumber and copper accomplished technical excesses and have been hit hard. Credit spreads, which measure the difference between high and low-grade bonds, are close to reversing towards adversity.
The problem with financial wires has been that when the smoke gets out it not just from one wire that can be isolated. It suddenly gets out of wires everywhere and the severity of financial contractions has been proportional to the degree of preceding speculation.
All the great bubbles, of which 1929 was number five, suffered forced liquidation in the Fall of the climax year, when all the wires not only smoked but melted.
For global financial markets now, contraction is a daunting prospect. Even worse for policymakers whose theories include no review of wires with smoke in them.
Bob Hoye (BobHoye.com) has been researching investments for decades, which eventually included the history of financial and political markets. He considers now to be the most fascinating time for both since the Great Reformation of the 1600s. Bob casts a caustic eye on all promotions and, having a degree in geophysics, is severely critical of the audacity that a committee can “manage” not just the economy, but also the temperature of the nearest planet. He has had articles published in major financial journals and, as a speaker, has amused assemblies in a number of cities, from London to Zurich to Tokyo.
