Is 2017 going to be the year of evaporating imaginary wealth?
Wealth - real and imaginary.
Central Banks and the wealth effect.
Real wealth comes from the real economy where real products and services are traded.
This involves hard work which is something the financial sector is not interested in.
The financial sector is interested in imaginary wealth – the wealth effect. Hardly any of their lending goes into productive lending into the real economy.
They look for some existing asset they can inflate the price of, like the national housing stock. They then pour money into this asset to create imaginary wealth, the bubble bursts and all the imaginary wealth disappears.
1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)
2015 – China (margin lending into Chinese stocks)
Central Banks have now got in on the act with QE and have gone for an “inflate all financial asset prices” strategy to generate a wealth effect (imaginary wealth). The bubble bursts and all the imaginary wealth disappears.
The wealth effect – it’s like real wealth but it’s only temporary.
The markets are high but there is a lot of imaginary wealth there after all that QE. Get ready for when the imaginary wealth starts to evaporate, its only temporary. Refer to the “fundamentals” to gauge the imaginary wealth in the markets; it’s what “fundamentals” are for.
Canadian, Australian, Swedish and Norwegian housing markets are full of imaginary wealth. Get ready for when the imaginary wealth starts to evaporate, its only temporary. Refer to the “fundamentals” to gauge the imaginary wealth in these housing markets; it’s what “fundamentals” are for.
Remember when we were panicking about the Chinese stock markets falling last year?
Have a look at the Shanghai Composite on any web-site with the scale set to max., you can see the ridiculous bubble of imaginary wealth as clear as day.
The Chinese stock markets were artificially inflated creating imaginary wealth in Chinese stocks, it was only temporary and it evaporated.
It’s what happens.
“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
Irving Fisher’s belief was based on an absolute faith in markets based on neoclassical economics which states markets reach stable equilibriums.
How have we fallen for this nonsense a second time?
In 2007, Ben Bernanke could see no problems ahead.
Ben Bernanke’s belief was based on an absolute faith in markets based on neoclassical economics which states markets reach stable equilibriums.
In 2015, everyone was panicking about the fall in the Chinese stock market.
Everyone’s panic was based on an absolute faith in markets based on neoclassical economics which states markets reach stable equilibriums.
In 2016, no one can see any problems with the housing markets in Australia, Canada, Sweden and Norway.
Everyone’s belief is based on an absolute faith in markets based on neoclassical economics which states markets reach stable equilibriums.
Just like Irving Fisher in 1929 when he said “Stocks have reached what looks like a permanently high plateau.”.
It was wrong then and its wrong now.
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