Weimar 2.0 in the making, everything bubble is bursting


One of President Trump’s profoundly damaging legacies is and will be the explosive rise in the national debt that occurred on his watch. The financial burden that he has inflicted on the whole US society will wreak havoc for decades. The growth in the annual federal budget deficit under Trump ranks as the third-biggest increase, relative to the size of the economy, of any US presidential administration.

If you’re over 50 you have lived through at least three epic financial bubbles: junk bonds in the 1980s, tech stocks in the 1990s and housing in the 2000s. Each was spectacular in its own way, and each threatened to take down the whole financial system when it burst. But they pale next to what is happening today. Where those past bubbles were sector-specific and resulting carnage occurred mostly within one asset class, today’s bubble is spread across, pretty much everything – hence the term “everything bubble.”

Warning signs

In mid-February, 2021, Bank of America (BofA) warned the investors that the year 2021 is such that “real inflation” (as opposed to financial) will run amok sooner or later and events will play out in the coming months in such way that “the velocity of people will rise” and “the velocity of money will (also) rise”. The bank writes that since the core 2021 trends will be “vaccine – virus” and “reopening – lockdown“, this means that human mobility will rise and macro data will surge.

In the framework of the US economy, there is a concern of huge and growing US government budget deficits and indebtedness, Fed’s excessive capital injections, dollar debasement and growing societal inequality noticing lurking inflation. It is noticeable that in the past twelve months, the US Government made $3,5 trillion (17% GDP) budget deficit, coupled with injection of $13,3 trillion in global central bank liquidity. All this massive policy stimulus continues to flow directly to Wall Street (making nearly weekly new all-time highs) inciting historic wealth inequality via asset bubbles.

In addition, the US trade deficit in goods worsened by 6% in 2020, to $916 billion, the biggest and worst deficit ever. Exports of goods plunged by 13.2% to $1.43 trillion, the worst since 2010. Unemployment rate is still at high level (6,3% in January 2021 compared with 3,5% in January 2020 before pandemic) and the economic growth is stumbling due to pandemic lockdowns and recent arctic freezing winter temperatures in Texas and other 13 states, which will constrict effectively possible fragile economic growth.

Making things worse, Texas freeze is causing the largest ever US oil production decline. The US crude oil production has plunged by as much as 40 percent due to the Polar Vortex that brought freezing temperatures most notably to Texas, where wellheads and pipelines froze. Now, this is turning into a global problem and it is not just lost oil production, either. Power outages led to the shutdown of several refineries in Texas, which removed an estimated 3 million bpd or more in refining capacity. Typically, shortages in productions mean increasing retail prices. In worldwide consideration, substantial retail price increases of oil products have occurred already, besides the US, in China and India.

In Texas, large outages in electric power supply and water service, even in food supply chains indicate the low quality of basic infrastructure in American society. When adding here the mismanagement of Covid-19 pandemic, the results disclose the dangerously low state of American public service systems as a whole. Meanwhile, the retail prices of electricity are right now skyrocketing in Texas.

Real inflation lurking

The economists expect the inflation “mutating from Wall Street to Main Street” (financial inflation turning in real inflation) resulting in a pop in “everything bubble”. The present US situation of 2021 is comparable in many ways with the post-WWI Germany in 1918 (Weimar Republic), where large unemployment, depreciation of savings and even the Reichsbank’s monetization of state debt was similar with the present Fed’s monetary operations.

BofA believes that real assets will outperform financial assets. The year 2020 marked long-term low for interest rates / inflation but 2020s is likely a decade when inflation assets outperform deflation and real assets outperform financial.

Looking at things from a macro lens, inflation fears are increasing rapidly and there is a historic amount of capital filtering through global financial markets due to all of the huge stimulus programs worldwide. Ironically, the widespread inflation fears that have emerged in recent weeks and months are even becoming self-fulfilling, in a way, given investors are buying commodities to hedge these inflation fears which in turn drives commodity prices higher, thereby creating inflationary pressures. Recent oil price trend constitutes an excellent concrete example of this and will strengthen inflationary expectations. An absurd interest rate formation (negative rates) cannot prevail for any longer time.

A number of highly respected US financial researchers are warning now on the twin dangers of a market crash and higher inflation, which actually could indeed happen in the near future. Today’s various market values in the US are historically at unprecedented levels of over-valuation. So, ugly as it is to contemplate, we may be dealing with declining markets and rising inflation as 2021 progresses.

Janet Yellen

New US Treasury Secretary, Janet Yellen recently said that the US could achieve full employment recovery, if President Biden’s Covid-19 stimulus package ($1,9trillion) is passed. “I would expect that if this package is passed, we would get back to full employment next year,” Yellen told in CNN interview. Yellen dismissed the warnings that US inflation could spike out of control if Biden’s massive stimulus bill goes into effect. This came after economists pointed out a broad fiscal stimulus combined with the federal reserve’s ultra-low interest rates may lead to asset bubbles and double-digit inflation. Even former Treasury Secretary Larry Summers has raised concern Biden’s package would “flood the economy” and lead to high inflation. Yellen claimed the benefits of short-term relief outweighed the long-term structural risks to economic stability.

A number of American economists have said that Yellen’s words indicate we have clearly entered the area of “Destructive Recursion,” a term coined to refer to a system that keeps feeding power back into itself and is controlled by those who are destroying it. In their opinion, Yellen seems not to understand the whole problem and dynamic of unemployment / employment.

As an ex-Fed Chair, having played an important part in creating today’s everything asset and credit market bubble, it would seem to be fitting that it might burst now on Janet Yellen’s watch. However, the US and the rest of the world will eventually pay heavy price for her economic policy misjudgments.

Bubbles will burst

What happens, when one of these above-mentioned bubbles bursts? The others burst too, in short order. You cannot have a big, systemically dangerous bust in one sector and peaceful good times in all the others. Markets, now more interconnected than ever, simply do not work that way.

Meanwhile, the actions necessary to fix some of these bubbles are mutually exclusive but if you let everything blow up at once, there will be literally no fixing any more. The “everything bubble” has become the “everything bust.”