The “Everything Bubble” & “Bubble Mentality,” Risks & Leverage, the Fed’s Response, Tesla, Netflix, LIBOR, and How it Might End

Reality simply doesn’t matter — until it suddenly does.

Wolf Richter with Chris Martenson on Peak Prosperity’s Featured Voices, discussing the various aspects of the “Everything Bubble,” the “Bubble Mentality,” what it has wrought, and where it is headed.

The “Everything Bubble” has a number of side effects, including booming lending by specialized lenders, some of them backed by private equity firms, to car buyers with subprime credit ratings, which worked fine for years. But now subprime auto-loan delinquencies have surged to the highest rate since October 1996, and three of the smaller specialized lenders just collapsed into bankruptcy or were shut down. Allegations of fraud and misrepresentations are swirling through the bankruptcy filings. Read…  Subprime Carmageddon: Specialized Lenders Begin to Collapse

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  40 comments for “The “Everything Bubble” & “Bubble Mentality,” Risks & Leverage, the Fed’s Response, Tesla, Netflix, LIBOR, and How it Might End

  1. Robert_D says:

    Nice subtitle — “Reality simply doesn’t matter — until it suddenly does.”

    From Ayn Rand if I remember correctly, “You can ignore reality – – – but not the consequences of ignoring reality.” ( Or something like that )

    And another favorite, as person who is wont to be short, “Markets can remain irrational longer than you can remain solvent.” That one I have totally experienced a few times !

  2. walter map says:

    “… and How it Might End”

    I will plainly tell you how it will end.

    For the world’s more full of weeping than you can understand.

    The Stolen Child

    That is how it will end. La tristesse durera toujours.

    • walter map says:

      Bloomberg presently reports DJIA futures at -67. You will know it is real when they report -6700.

      I’ll wait.

      • Tom Kauser says:

        Short volatility dumb asses must buy stocks to stop losing money? Eight days up pre open cant be explained any easier?

    • Tom T says:

      Hello Mr. Map,

      Missed your commentary. Glad to see you back.

    • Cynic says:

      ‘A brief light: a little laughter, more tears, and then….Goodnight!’

  3. Alex says:

    Not only have I learned that it is not IF, but When. And that it is not an TEOTWAWKI from one day to the next, but that it a slow unwinding.

    • Ed says:

      Yes. I think it’s a good time to go half cash. I could see politics, either foreign relations or domestic, create crises.

      Add that to the sky high valuations and lack of corporate investment in this bull.

      If I had to invest, maybe overweight India and AI ?

      • Ed says:

        Likely completely wrong, I recognize. :)

      • Wolf Richter says:

        In terms of investing in India, check out the huge banking crisis and corruption scandal with the banks, mostly state-owned banks, going on right now, including big bailouts. One of our local brewers (Mendocino Brewing) was owned by one of those frausters whose empire collapsed and whose money that he’d borrowed from the banks disappeared, and India is trying to get him extradited from wherever he is. Mendocino Brewing ran out of money and shut down in Feb. Too bad. I really liked their Eye of the Hawk.

        Before you invest in India, try to understand this banking crisis, why it happened, and what it means for the economy :-]

        • raxadian says:

          First they came for the American banks.

          But that’s okay, I am not an American Bank.

          Then they came for the European banks and I was to busy laughting to care.

          Now is too late, they are coming for me and I am your local bank.

          Happy Dreams!

        • Chris says:

          Even the banks in US were bailed out after the financial crisis. That does not mean there are no investment opportunities in the US. Nobody will say that the US is corruption free. Right now, India has some of the best investment opportunities in the world. Just like any investment vehicle, you need to do your due diligence.

        • RagnarD says:

          8.0% Wow!
          https://www.beeradvocate.com/beer/profile/200/641/

          Eye of the Hawk | Mendocino Brewing Company

          BA SCORE
          3.66/5
          Good
          975 Ratings
          Eye of the HawkEye of the Hawk

          Brewed by:
          Mendocino Brewing Company
          Style: American Strong Ale
          Alcohol by volume (ABV): 8.00%

        • Copernicus says:

          People that invest in China report mixed experiences. Some good, some bad.
          People that invest in India don’t report mixed experiences.

        • JB says:

          We all suffer when “liquidity” drys up.

        • John k says:

          India, like Brazil, will always have great potential.

      • MC01 says:

        I fled (investment-wise) both India and Brazil in 2013 and it has been one of the best calls I’ve made in my life.
        Both countries have long-running issues which they periodically swear to have fixed or being in the process of fixing and which periodically blow up like they have long done, causing carnage on financial markets and often mayhem in the streets.

        The most important issues (for a foreign investor) both countries need to address are the pervasive corruption which often makes China and Saudi Arabia look good by comparison (and which sadly is often the only way to get things done) and especially the state of their financial and banking systems.
        The long string of bank scandals they are having now in India and the ongoing weakness in loan demand in Brazil (especially from big companies) are not passing problems but the symptom of long-running issues.
        Until those issues are fixed, both countries will go through the cycle we have seen since the 80’s: brief explosive booms followed by long spells of stagnation with a lot of scandals thrown in between.
        If you can ride the boom and make a profit, good for you but when you get stuck in the aftermath… it’s not pleasant.

        • Cynic says:

          Reminds me of the saying:

          ‘The corruption in Brazil makes Spain look like Switzerland……’

        • Petunia says:

          Interestingly, both rich Indians and Brazilians keep their money in Dubai.

  4. Gershon says:

    It will end as all Ponzis end.

  5. William Smith says:

    You mentioned the term “positive cash flow”…. I had to look it up in the history books. What a quaint notion. With these “helpful” global auditing firms, ratings agencies and “brown paper bag” brigade such things are so passe.

    • Wolf Richter says:

      Yes, sometimes I feel like a fossil who still thinks, stupidly and blindly, that mature companies should have self-sustaining business models.

      • MD says:

        How very 20th century..!

        Just keep borrowing cheap cash to buy your own stock and keep that EPS powering upwards! Vest those options! That’s the 21st century way!

        One day perhaps us rationalists will have our day in the sun again..one day…until then, it’s ‘fake it ’til you make it’ all the way into third-world status it seems, I’m afraid.

        Next step in the continued illusion is state buying of stocks a la Japan, who paved the way for us all in this weird financialized world.

      • Yeah and if you compare Amazon and Tesla it gets even worse. If I was going to get in I would go long their bond and short the stock. Just because I think the next decade will belong to bonds and bond investors.

  6. raxadian says:

    The capability of mankind to fool itseft never has failed to amaze me.

    Have you guys heard of the five minute rule? Not that one. This one is about finances.

    Basically before you make a choice about money, you don’t do it on impulse but take at least five minutes to think things over. If it is something you can’t take at least five minutes to think it over because it just has to be “NOW!” then maybe you should just say no

    Is amazing how many stuff you end not wasting money in if you do that.

    Is just five minutes, that you would end wasting anyway in something else otherwise.

    That said, cheap advice like this is not the key to success, is at most a key to lose less money.

    Pessimists are usually better at handling money, optimists are wonderful at losing it. But optimists are more fun people to hang out with, just remember to never ever trust one with money.

    Actually never ever trust anyone with money, 95 of a 100 times you will be right on doing that.

    • Hirsute says:

      I don’t need 5 minutes. The only things I ever want to buy are groceries. That, and liquor. Every man needs one vice. I would really love being liberated from the compulsory purchases of “government services” via taxes. I’ve spent waaaaay more than 5 minutes trying to reduce that burden.

    • JZ says:

      Yes, you can spend 50 minutes thinking and trust nobody. Put the money in your own pocket and never let anybody to touch it. Better, you hide it so that nobody even knows you have it. Then what! The FED will rot your money 2%/year on paper and maybe 4% in reality, and at
      the same time jacking up prices for houses and rent. Your move? The point is, we are all forced to play a game and if you do NOT go along, you will be left behind. Your move.

      • Hirsute says:

        THE GAME. Exactly. A snippet from a recent David Stockman piece:

        “In the scheme of things, the President of the New York Fed is #2 in the whole central banking apparatus, and as such is immensely more powerful than any Senate Committee Chairman or House Speaker. But Williams’ appointment was not reviewed or passed upon by a single elected official accountable to any voter anywhere in the US of A.

        Yet here is an academic scribbler so out of touch with reality that he advocates raising the Fed’s inflation target to 3% because it’s purportedly good for American workers; and who for nearly 100 months also voted to keep interest rates pinned to the zero bound even though it was crushing savers and retirees.

        Worse still, Williams advanced these oppressions of the people because he claims to have espied an invisible thing called “the neutral rate” of interest that no saver or borrower in America has ever seen and that no free market would ever produce. That’s because the only true interest rate is the market rate at any given moment, not the artifacts pegged by the FOMC and the imaginary “target rate” from which they are derived.”

        • Petunia says:

          The moron is probably referring to the historical interest rate at which prices were stable, it was 3%. This rate was only sustainable in periods of no inflation. It was a real rate.

          Whenever the inflation rate rose, the interest rate was adjusted upward to reflect the increased inflation, this is what is referred to as a panic. I have read of panics where the rate went to 8% and 12%. These 3-4X increases bankrupted many in those days, as they would today.

  7. gorbachov says:

    SEll when everybody is buying

    Buy when everybody is selling

    I think it was “GETTY”

  8. Annual Income Statement (values in 000’s) Get Quarterly Data
    Period Ending: 12/31/2017 12/31/2014
    Total Revenue $11,758,751 $3,198,356
    Cost of Revenue $9,536,264 $2,316,685
    Gross Profit $2,222,487 $881,671

  9. akiddy1 says:

    I used to think that people like Chris Martensen, John Hussman, Mish Shedlock, Steen Jakobsen and the rest of the Sonoma County Annual (Bear market) Seminar were onto something in 2010 when the S&P was at 1100.

    Those guys really scared me around that time with their gloomy forecasts. I even put 5% of my portfolio into the GDX ETF in 2010 as a precautionary measure.

    It’s interesting to see that they are all still going strong 8 years later.

    • JZ says:

      I still have full respect for Hussman. His model is good and his method is sound. He does NOT sell doom, he manages money where his mouth is. Everybody can be wrong. In this cycle, it is more about game theory than it is about models. To quote Ben Hunt, “in a policy driven market, do NOT use models, and soon we will see policy controlled market, get ready.” Even Ben as a poker player game theorist had to keep whining about the FED has taken the power away from model builders and analyst, just buy stock ETF, nothing else works.

    • fajensen says:

      It’s interesting to see that they are all still going strong 8 years later.

      David Ickes is going strong also :).

      Just shows that there is a market for Everything –

      We are not that sophisticated a species after all: People believe whatever the hell they want to believe and pad out the gaps between reality and belief with rituals and stories. The more intelligent the believers are, the more sophisticated the stories for why the world is what it is.

  10. KPL says:

    @akiddy1,

    “It’s interesting to see that they are all still going strong 8 years later.”

    Yup! But then it will be equally, if not more, interesting when ALL the central bankers do QT (provided they can). It will not last 8 years though.

    • akiddy1 says:

      Those guys have selling doom and gloom forecasts for over a dozen years.

      “In the long run we are all dead”

      JMK.

      • KPL says:

        To be fair to them but for massive interventions by CBs (Endless QE, ZIRP, NIRP, a relay race by the CBs) the doom and gloom would very likely have come to pass. The distortions by the CBs have been so massive that I for one cannot believe that they can normalize without the doom becoming true. More likely would be more QE as soon as it appears the doom and gloom is going to be true.

  11. sierra7 says:

    The Fed instigated something in the aftermath of the ’08 crash that is unsustainable in the really long run. When the “end” comes they will be damned to Hades……..there can only be one outcome. They may be trying to tamp down the cheap money sustained asset prices but they have to know that they can’t keep this up. And, if they are “successful” in quelling those prices then the “froth” at the top will disappear. And there is only one way for the “markets” to go…We cannot sustain an economy that is held in the iron grip of “debt” for too many. Common sense tells you that is the real road to “serfdom”. This “bubble” has been blown up with toxic gas.

  12. Gershon says:

    Fear not, my friends. Janet Yellen assured us there would be no new crashes in “our time.” Just keep buying stawks, muppets, er, valued clients.

  13. polecat says:

    I’m holding on to my lamp post futures .. they’ll come in handy after ww3 !

Comments are closed.