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David Hay


Evergreen - GaveKal, EVA, Friday, January 11, 2019


This is the weekly GaveKal (titled also EVA) report from Friday, January 11, 2019 and one of a series of such reports focused on the 'Bubble 3.0'. And this weekly essay will be part I of two on the same general topic of the current financial bubble. The others in this series are listed below. The initial issue was published with the December 22, 2017 GaveKal weekly. The GaveKal reports are available by subscription from Evergreen and are provided in PDF as well as email format. In my summary I will insert my own comments about the text.



David Hay begins by referencing his previous articles on bubbles and writes that this one will discuss the "ridiculous hysteria that surrounded the Bitcoin mania" and then turn to focusing on the role of the central banks in inflating assets. So the larger and more important topic (issue) is the 'costs' that have resulted from "frantic efforts by global central banks to artificially create economic good times."

My thought is that it is the governments that are desperate to keep their 'welfare 'state' economies afloat and that the central banks are simply exhibiting their real status as the financial engines of their governments - it is they who were given the responsibility for creating money instead of their Treasuries (starting with the 'great compromise' that created the Bank of England) That 'compromise' initially was all about creating the credit funding for the English to wage war against France, not to provide 'welfare' to its citizens, but things do change.


Beginning with this Bitcoin mania (bubble) the author notes that it peaked about the time he began this series. He points out that the full 'mania' was not confined to absurd, continual, frantic buying of Bitcoins themselves at higher prices -until the inevitable collapse came. There were and still are many 'clones' promoted by other scam artists, and even more absurd, other companies having nothing to do with Bitcoin simply changed their business names to insert some reference to 'crypto - or block chain' involvement. He recalls the very similar phenomena in the late 1990's till 2000 -2001 in which wily promoters fed on the mania for 'dot com' stocks. He rightly terms the cause the 'illusion of easy profits'.

My thought again is that foolish individual investors may be excused for not knowing better, but the professional 'money- managers' likely did know better and were hyping the market in a typical 'pump and dump' game. The author tells us that the broad category including 'block chain' related stocks neared $1 Trillion at the peak. He provides two graphs of typical individual companies showing their incredible pointed spikes upwards that collapsed almost as quickly. He is justly able to note that Evergreen consistently advised 'beware' while such popular fonts of disinformation as CNBC eagerly promoted the absurd mania.
But, he continues, "It's hard to know how much wealth was created and then almost instantly destroyed globally" .. "But a conservative estimate is in the hundreds of billions; a more realistic guess is well over a trillion considering how much was lost by directly investing in Bitcoin and some of its kindred."


Here I must disagree. In my view NO wealth was created, hence no wealth was destroyed. At most much wealth was transferred from the gullible to the scam artists. It was all on paper, accounting ledgers. But that was a small fraction of what would appear from those dangerous looking spikes. I am sure David well understands the phenomena of how when one person buys one share of something with a price of $1.00 more than the previous price, automatically each of the other millions of shares outstanding is revalued up that same $1.00: Likewise in reverse when someone buys a share at a price $1.00 less than the prior price. So the market cap of the company jumps up or down and is shown in the daily statistics.
So the great majority of the 'investors' simply saw their market price rise and fall back - only if they were smart enough to sell at a higher price than they bought did they receive the wealth lost by the dumb counterparts who sold at a price less than they bought. Of course the real money was made by the 'market creators;' who took a fee off the top for every share transaction whether initiated as a buy or a sell order.


Now our author connected this 'block chain' fiasco to the larger picture of the central banks. and rightly so. It is their disastrous activity over years that has created the psychological environment in which the mass of ill-informed individuals are seeking every possible opportunity to salvage their finances in the central bank created economy and the financial industry insiders are likewise seeking every opportunity to create a new scheme that will generate the fees and commissions they skim off the top of the bank's magic money machine.
So indeed, "it is what it signified" it was as he describes it "the most grotesque example of global central bank policies that drove asset prices to absurd levels".
With routine, staid, common stocks leaping to absurd levels, well, why not, surely something as exciting as Bitcoin will have no upper limit.


Our author gives us another real world example - That "at one point over $10 trillion of bonds globally had negative interest rates was really all the proof any rational person should have needed". And, at his writing $7.5 Trillion in such negative interest rate debt remains on the accounting ledgers. He continues with more examples.


Before continuing with his material, my thoughts: We are familiar with the idea that when investors believe there will be 'inflation' - that is the relative 'value' of money will decline - they demand greater and greater interest rate return on their loans to compensate for the real loss of principal. - So, when investors are willing to loan money at a negative interest rate, does that mean they they expect 'deflation' - that is the value of money will increase relatively to other assets? This means the relative value of their money will increase in comparison to the other assets - the very assets the central banks have pushed to unprecedented levels.


Personally, I have been asserting for nearly 20 years that David H. Fischer was correct when he predicted the coming era of deflation in his book 'The Great Wave'. -


So Mr. Hay repeats his cogent comment in the Dec. 21, 2008 GaveKal - "If one accepts the reality - that recent years have seen the lowest interest rates in 4000 years, then how could we not be at least going through a massive bubble, if not, as I've contended. The Biggest Bubble Ever?" He continues with more charts which indicate a causal connection he sees between the "QE-mania" and the inflated asset 'values'.

I agree but want to know WHY.


In a footnote here our author expresses his concerns about the lengthy continuation of the bank created asset bubble in comparison to the previous bubbles he rightly identified before their crash. These were the Tech bubble of 1990's (dot com); - the Chinese stocks in 2007; - the housing market 2005-2007; - and now the Bitcoin Bubble.

My opinion is that different 'bubbles' have different characteristic, especially in their funding. They can be dependent on the extent of the financial resources marshaled into the bubble. For instance, both the dot-com and the Bitcoin bubbles were strictly generated by private, mostly individual 'investors' (gamblers) and they collapsed when their participants ran out of money and/or began to realize their vulnerability. Granted the hedge funds and VC's who provided much of the financial firepower were using OPM supplied by that same FED money machine, but they mostly got out of the dot com bubble in time.
I believe the Chinese bubble was generated by two significant shifts in Chinese government policy. First, in response to the financial crash of 2007 they instructed the local governments greatly to boost creating credit (debt). And then, after the crisis they reversed policy and pressed to reduce liquidity (debt).
The world wide housing bubble was fueled by the entire volume of credit finance (mostly created by the 'shadow banking' system) diverted into the real estate industry which fueled participation by wide spread elements of the economy (in contrast to the dotcom and bitcoin bubbles), thanks to the government itself, not only the FED, which not only sent it up but caused a wide spread collapse. Real people lost fortunes in that one,
(Note that the dotcom and Bitcoin bubbles had very little if any impact on the wider economy - they were both wealth transfers. Now the central banks have unlimited financial assets since they create more as they go. Their asset bubbles will stop rising when they stop creating more credit money and would collapse if they reduce the credit money supply.
Will the governments allow them to do that? The 'welfare state' requires the continual creation of more credit.


My analysis is based on the study of the central economic activity of humans - exchange of production and consumption -meaning between producers and consumers. But that is too long to include here, I hope to provide that separately.


On the following page he provides two more graphs depicting rising asset 'values'. He expresses his feeling like the 'voice in the wilderness' standing against the continued popular crowd. But I do believe he is shouting 'make way for something big'. In the meantime the FED and other CB's are doing all they can to level the mountains and fill in the valleys. He notes the decline in the stock index of 12% from the date of his Sept. missive to December 31, thus thwarting his then comment that the market might yet see the first annual growth in 10 years consecutive. He gives us three more comments about this event - which include such gems as "fabricated funds" - "Volatility-free environment" - "never-say-sell crowd" - "still-over priced stocks" - "Bombed out issues". He terms the different reaction of the FAANGS and the rest of the market as a "two tier market".


He writes that the 12% decline in US stocks was another symptom along with other economic indicators. He remarks that the January 4th Dow increase of 750 points is a "typical bear market eruption", citing the negative example of the Purchasing Managers New Order Index. He maintains that the central bankers are still "convinced" that free money is the answer.


My opinion is that the cause - problem - is not the central bankers directly but the governments of 'welfare states'. It is the governments that are not only exchanging credit rather than real assets for the goods and services they consume, but also handing out free credit to the myriad of consumers who are not themselves producing anything to exchange for the goods and services they consume. The bonds that then appear in the bank balance sheet are the counterpart of that credit. The result is that consumption is being financed by government created credit rather than by real production.


David Hay continues with discussion of his critique of the central bankers who, he believes, hope for a "Immaculate Correction" to save themselves. He recounts some of his prior warnings, writing: "For well over a year, numerous prior EVA's have been warning about the dangers posed by the first ever double tightening' (i.e., both raising rates and reversing a decade of QEs" and "that the Fed is in a no-win position." He comments, "In other words, if it keeps tightening, it risks further roiling financial markets and increasing the already rapidly rising worldwide recession risks." For which he provides a chart from Ned Davis Research.


In my opinion, the FED is indeed in a bind; its two original purposes for which it was created are to provide as much money as the government wants and to protect the banking system. The reversal of the QE and start of a QT is by far the more dangerous of the two policies. That is what he means in the above comment. This is because changes in the rather focused interest rate the Fed controls indirectly by manipulating the size of the reserves the banking system must hold AT the Fed has less of an impact on the economy than does a significant reduction in the money supply occasioned by the QT. This is especially so since the Fed has actually been paying interest to the banks not only for their required reserves but also even for excess reserves.


He continues with comments about the reaction of the public to its perception of what the Fed spokesmen mean. He cites the estimable David Rosenberg on the connection between Fed actions and bear markets. He also cites prior Evergreen expectations that, "the global economic and financial systems have scant ability to withstand tighter monetary conditions." He rightly refers to Evergreen frequent warnings. And he notes that one cannot really evaluate such a policy (and action) as generating a bull market until one evaluates the following bear market to learn what the ultimate result will be. He closes with the promise to provide additional analysis in the subsequent issue - "What Price Prosperity? (part II) on 18 January.


He again, however, lays the problem at the doorstep of the Fed and CB's - the "planet's monetary magicians conjured up $15 trillion to create prosperity." Again, I believe the culprits are the governments that have created that $15 trillion that appears on the central bank's ledger as 'debt' by exchanging 'credit' for consumption. And I will accompany that with my thoughts about that issue, which is already in my hands.


The other GaveKal - EVA reports in this series: Note that the dates indicate they were published from time to time, in between Evergreen published its weekly reports on other subjects. They are all available at the Evergreen on line archive

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Biggest Bubble ever - Feb. 9, 2018

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Bubble 3.0 How Central Banks Created the Next Financial Crisis - April 27, 2018

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Bubble 3.0 How Did we Get Here Part I - June 1, 2018

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Bubble 3.0 How did we get Here Part II - June 8, 2018

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Bubble 3.0 A Fast and Furious Challenge - July 6, 2018

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Bubble 3.0 Up from the Ashes - August 24, 2018

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Bubble 3.0 The Biggest Bubble Inside the Biggest Bubble Ever - Sept 21, 1018

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Bubble 3.0 What Could Go Right _Oct 12, 2018

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Bubble 3.0 The Upside of Downside - Nov, 30, 2018

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Special Edition EVA, The Stealth Bear Market - Dec 14, 2018

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What Price Prosperity? Part I, January 11, 2019

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What Price Prosperity? Part II, January 18, 2019

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Bubble 3.0, Chapter 10: No Way Out, February 22, 2019


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