The upswing usually starts with an opportunity - new markets, new technologies or some dramatic political change - and investors looking for good returns.
It proceeds through the euphoria of rising prices, particularly of assets, while an expansion of credit inflates the bubble.
In the manic phase, investors scramble to get out of money and into illiquid things such as stocks, commodities, real estate or tulip bulbs: 'a larger and larger group of people seeks to become rich without a real understanding of the processes involved'.
Ultimately, the markets stop rising and people who have borrowed heavily find themselves overstretched. This is 'distress', which generates unexpected failures, followed by 'revulsion' or 'discredit'.
The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king.
May 11, 2007
One more time, for the uninitiated, from Manias, Panics and Crashes (got cash?)
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17 comments:
how cash will be king if the greenback is as under as the real estate will be after bubble deflates?
How are stocks illiquid? All I have to do is hit the sell button and they are sold.
"cash" does not mean US dollar
"cash" comes in many forms
"get liquid" is the underlying advice
China will wait until the deflationary crash and then use their massive surplusses for pennies on the dollar. They'll move corporate headquarters to China and drastically cut U.S. staff.
Stocks and commodities are NOT illiquid. I assume this must be a typo on your part.
* The distinction between money and credit is significant. A huge expansion in money supply leads to hyperinflation like the Weimar Republic or Zimbabwe.
* A huge expansion in credit eventually leads to things like the tulip mania implosion, the railroad bust, and the great depression.
These two bullet points from Mish are critical in understanding where we are headed. We have high asset inflation because of credit expansion, while money stock [M Prime} is decreasing. We won't be burning bundles of dollars to cook like they did in Germany.
keith said...
"cash" does not mean US dollar
"cash" comes in many forms
"get liquid" is the underlying advice
Don't confuse credit with money stock. Credit may be infinite, but the money stock isn't when you have a yoy contraction in [M Prime]. The $USD is what people will need as they liquidate their illiquid assets to raise cash for the debt they have piled on to their personal balance sheets..
The press has done a damn good job of snowing the sheeple into a misunderstanding of what liquidity means. Liquidity now means debt, while it used to mean you had gone to cash.
There is a huge difference between the two.
Yesterday the Fed did a reverse Repo, and today they took no action whatsoever in TOMO or POMO. Strange times indeed.
If you think debt = liquidity, you are a total idiot.
Debt is NOT liquidity. Never was, never will be.
Please, if you think this way, you owe it to yourself to read manias panics and crashes.
I can't protect fools from themselves.
Debt = liquidity. Man, that's the stupidest thing I think I've ever heard.
Ever.
keith said...
If you think debt = liquidity, you are a total idiot.
Debt is NOT liquidity. Never was, never will be.
Please, if you think this way, you owe it to yourself to read manias panics and crashes.
I can't protect fools from themselves.
Debt = liquidity. Man, that's the stupidest thing I think I've ever heard.
Ever.
May 11, 2007 4:07 PM
You misunderstand my point completely. My point was the same as yours. Liquidity never meant debt until the MSM and the cheerleading crowd did the switcheroo on the sheeple.
The sheeple now confuse the true meaning of liquidity with what they have been spoon fed. Figured you were smart enough to understnad the point I was making. Instead you somehow think it's what I believe. DAMN!
Look at the LBO mania. We hear that it's liquidity feeding this mania. Nothing could be further from the truth. It's debt, as in junk, that's fueling this mania.
Get it?
I am seeing a lot of retail stress this Spring. Stores closing down. Acres and acres of new malls which have never had tenants.
MONEY VS CREDIT
* A huge expansion in money supply leads to hyperinflation like the Weimar Republic or Zimbabwe.
* A huge expansion in credit eventually leads to things like the tulip mania implosion, the railroad bust, and the great depression.
======
Yes! This is critical distinction that takes a while to understand.
However, there is one way that Huge Credit can lead to Huge Money.
If people lose confidence in US Debt and start dumping it, the US Government can decide to 'monetize' it which means printing Huge Money to buy it up.
This will prevent interest rates from soaring as would normally have to happen, but it will trigger the hyperinflation associated with Big Money.
===
So right now, we have BIG CREDIT and associated asset bubbles. When confidence is housing credit popped, housing assets declined in value.
If confidence in US Treasury debt is popped, the US can either massively raise interest rates on TBills to get people to start buying them again, and cash will flow from all currencies to start buying USD to then buy Tbills.
Or they can ask the private banks that make up the Federal Reserve to print billions in new cash from thin air and buy all those Tbills.
The government will then be flush with new cash that it will inject into Defense contractors, paying the Fed interest on those Tbills, and various other people who will benefit. But then they will spend it and create massive inflation.
Fun choice. That is why the Government is working hard to keep the Chinese buying Tbills and trying to get them to buy some crappy US products to balance our trade deficit. They can also use the military gun to hold to countries heads (Saudi?) and make them accept US debt.
credit turns into debt which turns into money (or not) for someone. too much credit equals worthless money in the end for everyone.
GK said...
MONEY VS CREDIT
* A huge expansion in money supply leads to hyperinflation like the Weimar Republic or Zimbabwe.
* A huge expansion in credit eventually leads to things like the tulip mania implosion, the railroad bust, and the great depression.
======
Yes! This is critical distinction that takes a while to understand.
However, there is one way that Huge Credit can lead to Huge Money.
If people lose confidence in US Debt and start dumping it, the US Government can decide to 'monetize' it which means printing Huge Money to buy it up.
This will prevent interest rates from soaring as would normally have to happen, but it will trigger the hyperinflation associated with Big Money.
===
So right now, we have BIG CREDIT and associated asset bubbles. When confidence is housing credit popped, housing assets declined in value.
If confidence in US Treasury debt is popped, the US can either massively raise interest rates on TBills to get people to start buying them again, and cash will flow from all currencies to start buying USD to then buy Tbills.
Or they can ask the private banks that make up the Federal Reserve to print billions in new cash from thin air and buy all those Tbills.
The government will then be flush with new cash that it will inject into Defense contractors, paying the Fed interest on those Tbills, and various other people who will benefit. But then they will spend it and create massive inflation.
Fun choice. That is why the Government is working hard to keep the Chinese buying Tbills and trying to get them to buy some crappy US products to balance our trade deficit. They can also use the military gun to hold to countries heads (Saudi?) and make them accept US debt.
May 11, 2007 5:23 PM
I agree with your point on where we are at this point. HUGE CREDIT. The question is will they start the printing presses should confidence in the $USD collapse.
I'm with Steve Roach concerning a so called decoupling by the rest of the world and America. It ain't gonna happen AT THIS POINT. It will in the future if we don't make some fundemental changes.
So I ask myself what is in the best interest of our creditors at this point? A controlled devaluation of the $USD would be much more favorable for them than a rush to the exits.
In fact, we may see China blowup based on some very sound reasoning. If that were to take place, where do you think the world will want to put it's money?
I do know when a market turns, it's the things that were shunned that many times become the new stars. Interesting times.
Anonymous said...
credit turns into debt which turns into money (or not) for someone. too much credit equals worthless money in the end for everyone.
Firstly, credit is debt as soon as it's created. Look no further than sub-prime to see the very big difference between booking Neg AM as income and actually realizing the tangible money stock from the defaulting loan. All these companies were paper rich, but go ask them today how much physical money they have on hand. A big fat goose egg!
uniball said...
"How are stocks illiquid? All I have to do is hit the sell button and they are sold. "
Um...there still has to be a "buyer"
I'm long on cash, always have been. I don't own a single stock, never have. I remember when 60 Minutes used to have that monkey on every year that did better stock picks than the experts. I will never know as much as the experts and have come to believe that every dollar made in stocks means that someone else lost a dollar. I'm probably wrong, but so are most religions and you'll not convince them either.
My money is in simple cds, spread out over enough banks to make sure the FDIC kicks in [yes I know, failure, doom, distruction, but FDIC will be the last to fail] never over 6 months in length. Did I lose? On paper, yes, but it's the same paper that says housing investments go up 5% per year. Do I have an ungodly amount of cash in the bank, you bet, enough to retire for the rest of my life [I'm 50]. I live in a modest home. I drive a 4 year old car. I have never had a second mortgage. I have never done a cash out refi, yet I'm a pretty big player in the mortgage industry. I guess it's because all I wanted out of life was to be adequate and have unquestionable integrity. Anything above that, such as wealth, expertise, social acceptance were just a dream NOT AN ENTITELEMENT.
Analyze all you want, I truly believe the Chinese are indeed buying up the place, I truly believe that they'll own 65% of all SFR's before the end of the decade, I truly believe the dollar will be worth squat, but I have a lot more real, tangible, touchable dollars than you have in FIAT stocks. 100 times value for a company, please, who falls for that crap?
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