It was Austrian economist Ludwig von Mises that described what he called “Katastrophenhausse.” Roughly translated into English, it is the Boom that sets up a later bust, or “crack-up.” Sort of like an airplane that exceeds it altitude ceiling, loses control, and crashes to the ground.
Each crack-up boom is usually preceded by an onslaught of new government fiat money (or its alter-ego, cheap credit.) Every dollar of it has to find a home, and it usually does. Trouble is, the new homes are not necessarily good ones- they are more like foster-care homes until the capital finds more responsible parents to live with.
In the boom phase a lot of incredible things happen, especially in the financial markets. People get excited. They get greedy seeing all the money that house-flippers, momentum players, and day traders make! A whole industry flourishes teaching novices to multiply their wealth! (For a tidy fee, you understand.)
Today we see a real estate mania, with houses being bid up above their asking price, with all closing costs paid by the buyer. An investor even offered $20,000 for a small piece of land owned by my parents, made useless by a perpetual easement to a cell tower company.
Every house requires building materials, and those and other commodities are being quickly bid up in price. Nickel, copper, palladium, rhodium, silver- just about every valuable element with a commercial use is skyrocketing in price.
Over in the stock market, Matt Levine offers an analysis of the bid-up of the stock GameStop:
“Bloomberg’s EEO screen tells me that consensus analyst estimates for adjusted earnings per share are negative $2.10 in 2021, negative $0.62 in 2022, positive $0.24 in 2023 and positive $1.25 in 2024. The stock closed yesterday at $181.75 per share, or 145 times four-years-ahead earnings.” (A reasonable price-to-earnings ratio is considered to be no more than 20 to 1.)
Not to be outdone, there is the stock of electric carmaker Tesla. Cathie Woods of Ark Invest seems to be the world’s biggest cheerleader for this company. She forecasts a $3000 per share price for this company by 2025.
But as analyst Bill Bonner points out in his private newsletter, “Imagine that there are 100 million automobiles sold in 2025. And imagine that automakers could make $2,000 on each one. That gives us a TOTAL POSSIBLE earnings base of $200 billion.”
“So to make sense of Cathie Wood’s price target of $3 trillion [in stock cap], at a reasonable price-to-earnings (P/E) ratio of 15, we also have to imagine that Volkswagen, Toyota, Audi… all 14 of the major automakers… somehow disappear, along with their 60 popular brands, leaving Tesla with 100% of the auto market, rather than just the 1% it has now.”
Just how likely is it that all the car companies on earth will go out of business except Tesla?
Then there is the employment market, which cannot find enough workers at any wage rate. Scores of business owners tell me they cannot find enough workers to meet demands of their customers. Restaurants in particular are crying for workers previously laid off. I advertised for a dental assistant and got four candidates in a row who no-showed for interviews. Of course, it doesn’t help that a large body of laborers have gotten comfortable sitting on their buttocks at home during the corona virus, and getting paid fairly well for it to boot.
When people see the “miracles” wrought by the boom, over-confidence is bred. Everyone wants a piece of the action, even those with insufficient cash reserves. I read that margin debt for brokerage accounts is now at a record high. Leverage can increase your profit on the way up, but it can kill you on the way down. As margin calls come, the market cascades downward even more quickly than it ordinarily would.
An old saying of mine is that “Nothing breeds failure like uninterrupted success.” Flush with past gains from speculation, humans continue taking ever more risk. Eventually stratospheric valuations of real estate, commodities, and equities are stopped by some unforeseeable event. Long ago in France, it was the sight of a count redeeming his shares of the Louisiana Company for gold coinage. The population witnessing the wagonload of gold being hauled through Paris was the pin that popped the bubble. Only then did they realize the crack-up phase of the boom had commenced. They wanted out quickly, but few got their money back, except for the Count.
Everyone wants to enjoy the party, but nobody wants to be busted by the cops when the revelry gets out of hand. It is so hard to know exactly when to leave the party, is it not?
Dr. Kim Henry
March 27, 2021
An Inflationary Boom Is Coming. Bill Bonner.