Wednesday, 18 August 2021 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[3 min read]

• Shiller sees bubbles in stocks, homes, and crypto
• Crashes in one market quickly lead to crashes in others
• Meltdown follows melt-up
• The Fed is highly confused and confusing…
• …but it doesn’t matter now

Dear Reader,

Jim Rickards doesn’t hold with many mainstream economists’ ideas. Still, he is closely following the work of Robert Shiller — and right now, Shiller has a dramatic warning message about simultaneous market bubbles.

Further down, Jim points out that ‘Fedspeak’ is alive and well and as confusing as ever.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

By Jim Rickards Editor, The Daily Reckoning Australia

I don’t hold many mainstream economists in high regard. They mostly cling to obsolete or defective models (such as random walk, efficient markets hypothesis, Phillips Curve, wealth effect, and many more) and they are impervious to contrary data, alternative models, and common sense. However, there are exceptions.

Shiller sees bubbles in stocks, homes, and crypto

One of the few mainstream economists whose work I follow closely is Robert Shiller, winner of the Nobel Prize in Economics in 2013. Shiller is a true pragmatist. He develops models that reflect reality rather than creating abstract models and forcing data to fit some preconceived and erroneous curve. He has also developed metrics such as the Case-Shiller home price index and the CAPE Ratio to track price movements and potential bubbles in key asset classes.

Savvy investors are well advised to follow Shiller and be alert to his warnings. And right now, Shiller is issuing one of his most dramatic warnings ever. Shiller is warning that stocks, housing, and cryptos may all be in extreme bubbles at the same time. Shiller uses data series that go back over 100 years in some cases, so he has a deep perspective on business cycles and prior bubbles on which to base his forecast.

Crashes in one market quickly lead to crashes in others

If you think that stocks and cryptos or housing and cryptos are unrelated markets, you may be in for a nasty surprise. These markets seem unlinked when times are good, but severe problems in one market tend to spill over into other markets quickly. Investors suffering huge losses in cryptos will sell stocks to raise cash. Investors suffering huge losses in stocks may put off buying a new house or even sell their existing home to deleverage. Crashes in one market quickly lead to crashes in other markets because of leverage, liquidity preferences, and simple panic. In a market meltdown, you don’t sell what you want, you sell what you can, and that often means dumping assets in one market to make up for losses in another. That’s how uncorrelated markets become conditionally correlated in a meltdown.

Meltdown follows melt-up

Shiller is not saying markets will crash tomorrow. He’s saying they’re exhibiting the kind of melt-up behaviour that often precedes a crash as happened with dotcom stocks in 1999 and housing in 2006. There may be further gains ahead, but we’re closer to the end than the beginning. Based on Shiller’s advice, it may be time to lighten up on exposure to all three asset classes even if you don’t get out completely. Markets may not crash tomorrow. But no one should be surprised if they do.

Meanwhile…

The Fed is highly confused and confusing…

Beginning with Paul Volcker in the early 1980s and continuing with Alan Greenspan in the 1990s and early 2000s, Federal Reserve officials developed a new language called ‘Fedspeak’.

Fed governors and chairmen frequently have to testify before Congress, give speeches, or do media interviews. They know they have to say something that seems to have substance. They know they have to be technically correct. On the other hand, they often don’t want to disclose what they actually intend or what they see behind the scenes. Either that or they really don’t know what they’re doing and can’t let people know that.

The way to reconcile these public appearances with as little transparency as possible is to use Fedspeak. It consists of an artful blend of platitudes and jargon intended to sound expert, but which actually says nothing. Paul Volcker used to practice Fedspeak behind a cloud of smoke from his huge cigar back when you could actually smoke indoors.

…but it doesn’t matter now

Fedspeak is both confused and confusing. And that’s the point. Alan Greenspan once captured the essence of Fedspeak when he testified to Congress, ‘If I seem unduly clear to you, you must have misunderstood what I said.’ Another bit of candour was when Greenspan said, ‘We really can’t forecast all that well, and yet we pretend that we can, but we really can’t.’

Fedspeak may have been invented by Volcker and Greenspan, but it’s alive and well today as shown in this article. The article quotes Fed Vice Chairman Randy Quarles testifying before Congress on the possibility of inflation due to Fed policies of zero rates and huge asset purchases.

Quarles first says, ‘I don’t want to overstate my concern’ about inflation and does not expect a breakout. He then pivots and says:

‘If my expectations about…inflation…are borne out…and especially if they come in strong…it will become important…to begin discussing our plans to adjust the pace of asset purchases.’

In other words, we may be getting close to a new ‘taper’ and possible taper tantrum. So which is it? Inflation or no inflation? Quarles says both and therefore really says nothing of substance. And that’s a good example of Fedspeak.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.