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The Everything Bubble Is Really A Grand Illusion

Everything Bubble
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EDITOR NOTE: Did central banks worldwide overreact to the Covid-19 pandemic in its monetary response? That’s what the article below illustrates. Compare the global response to Covid against the measures taken during the 2008 financial crisis, and you’ll see how much the former dwarfs the latter. Many critics of the Fed claim that an “everything bubble” is the result of such rampant money printing and spending. The author below, however, begs to differ, claiming that such a notion might be an illusion, and he backs it up with compelling evidence. But the point here is not which side might be right. And we’re certainly not of the mind to wait to find out. That’s why investors diversify their assets, to begin with. It’s not about weakening your portfolio’s growth potential but rather increasing your “return sources” to accommodate for various scenarios that will take place at least once. An inflationary scenario can be very damaging, depending not only on its severity but also on each person’s stage in life, such as time to retirement. Non-CUSIP gold and silver provide that extra return source that no dollar-based assets can provide. They’re also safe-haven hedges; what we call “sound money.” Hence, they should always have a place in your portfolio--rain or shine.

In the aftermath of the Black Plague which swept across Europe between 1347 and 1353, wiping out between 30 and 60% of the population, the European economy changed dramatically.  

The Black Plague had a lasting socioeconomic impact; for example, towns and cities emptied, and the sudden reduction in the labour force saw wages rise. Meanwhile attitudes towards death – and life – changed. The Latin phrase, carpe diem, quam minimum credula postero – seize the day, place no trust in tomorrow – epitomised this profound shift in attitudes.

The current pandemic, whilst utterly tragic, has been far less catastrophic, but due to the policy response it too appears destined to leave its mark in changing patterns of living and working. Unlike the 1350’s, however, where the changing price of goods and services signalled imbalances in supply and demand, the valiant monetary and fiscal actions of governments and institutions have distorted this price discovery mechanism. 

During the first months of the lockdown, economic growth declined and the price of many equities – and even bonds – fell rapidly. Central banks responded, as they had during the Great Financial Crisis (GFC) of 2008/2009, by cutting interest rates, or, where interest rates could be cut no further, by increasing their purchases of government bonds and other high grade securities. As a result of these purchases, major central banks balance sheets have swollen to $29trln: –

Total Assets of Major Central Banks

`Source: Yardeni, Haver Analytics


The effect of central bank actions has spilled over into a ballooning of global money supply: –

Global Monetary Growth

Source: Yardeni, Federal Reserve


Governments, cognizant of the limitations of their central banks, also reacted, providing loan guarantees, supporting the furloughing of employees and sending direct payments to the rising ranks of the unemployed. The chart below, which is from July 2020 and therefore does not account for the recent US $1.9trln spending package, nor the $2trln infrastructure proposal, shows the scale of these endeavours in comparison to the fiscal largesse of the GFC: –

cross country stimulus

Source: McKinsey

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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