Bubbles, Bubbles, Toils and Troubles
Joe Costello on the mammoth consequences of the Doom Cycle and boom-and-bust economics.
John Authers has a nice little piece at the FT marking the 10th Anniversary of NASDAQ peak, yahoo, or should I say pets.com, those were the days. Authers shows the charts on how when a bubble pops, it’s many years before things recover. For example, ten years on, the NASDAQ has barely and briefly seen half its high, while the Japanese Nikkei is just above a quarter of the value it reached at its peak 20 years ago. Don’t count on seeing any new housing highs for a very long time.
Authers makes a most important point on leverage, it is a serious aspect of many bubbles, and nothing helps leverage like low interest rates. Mr. Bernanke has done everything he can and the results of what he’s done, they won’t be good, will take years to play out. Auther’s writes:
“The past decade was driven by leveraged investors. Those low interest rates made it far cheaper for investors such as hedge funds to magnify their returns with leverage. Thus they came to drive the market.
They were helped by another artefact of the dotcom crash. Mutual funds (and the portfolios of the new breed of day traders) crashed with the Nasdaq. Hedge funds, able to sell short and to switch between asset classes, were able to make money during the years of the dotcom bust. That in turn attracted huge new flows from institutions, who are as prone to chase performance as anyone else.
As a result, many of the technical and leverage-driven strategies used by hedge funds, and by banks’ proprietary trading operations, became top-heavy. Far too much money was thrown at structured credit investments, or at emerging markets’ currencies.
We all now know the consequences. A decade on, they are the consequences of the Nasdaq boom.”
At some point, we’re going to have to reboot the monetary system.
Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.