{"id":1439,"date":"2019-11-09T17:46:11","date_gmt":"2019-11-09T17:46:11","guid":{"rendered":"https:\/\/www.mathewbinkley.org\/?p=1439"},"modified":"2019-11-10T19:55:06","modified_gmt":"2019-11-10T19:55:06","slug":"bubble-bubble-toil-and-trouble","status":"publish","type":"post","link":"https:\/\/www.mathewbinkley.org\/?p=1439","title":{"rendered":"Bubble, Bubble, Toil and Trouble…"},"content":{"rendered":"

Two months ago I wrote a blog post<\/a> about where I thought the economy was heading.\u00a0 \u00a0Since then, I’ve learned some things which suggest more pessimistic outcomes.\u00a0 I wanted to write them down, both for my memory and to inform others.<\/p>\n

Assuming that a recession is headed this way, it would be quite helpful to be able to answer four basic questions:<\/p>\n

    \n
  1. How big<\/span> is the bubble?<\/li>\n
  2. What<\/span> pops the bubble?<\/li>\n
  3. When<\/span> does the bubble pop?<\/li>\n
  4. How<\/span> do we get back to normal?<\/li>\n<\/ol>\n

    For #1, I recently learned a very useful measure to gauge the size of bubbles:\u00a0 \u00a0Household Wealth vs GDP.\u00a0 Household wealth measures the value of everyone’s assets if they were sold at that instant at the current market price.\u00a0 For instance, if you owned 1,000 shares of Beenz.com, you might be a millionaire in 1999, or dead broke in 2002.<\/p>\n

    As a rule, household wealth shouldn’t grow any faster than GDP.\u00a0 \u00a0It’s a way of saying “the sum of everyone’s individual wealth should grow at the same rate as the entire country’s wealth”.\u00a0 \u00a0 So when household wealth *does* grow faster than GDP, it indicates that asset prices are in a bubble.<\/p>\n

    So what does it look like today?<\/p>\n

    \"\"
    \nRuh-roh…<\/p>\n

    In 2001, stock prices were inflated.\u00a0 \u00a0In 2007, home prices were inflated.\u00a0 \u00a0Today, it looks like *everything* is inflated.\u00a0 And the asset bubble is substantially bigger than the one that caused the Great Recession.<\/p>\n

    To put it delicately, this is unlikely to end well…<\/p>\n

    As for #2 (What pops the bubble), I have little new information on that, just various bits of speculation on my part.\u00a0 \u00a0The bubble doesn’t have to *pop* per se.\u00a0 \u00a0A “good” economic correction could slowly and safely let the air out and we could avoid serious problems (though a “good” correction would still feel painful, just less so).\u00a0 \u00a0The best advice I can give you is still “whatever it is, don’t be around when it *does* pop”.\u00a0 And if Italy starts having financial problems, be *very* afraid.<\/p>\n

    For #3, I mentioned last time about the yield curve, and how yield curve inversions predict recessions.\u00a0 \u00a0 Since then, the yield curve has reverted to normal.\u00a0 \u00a0Isn’t that great?<\/p>\n

    \"\"<\/a>
    \nNope.\u00a0 \u00a0It’s bearish, and a sign that a recession may be coming sooner than I thought two months ago.\u00a0 \u00a0 For the last three recessions, only a few months passed between the yield curve returning to normal, and a recession striking:<\/p>\n