Trump: “We’re in a Bubble”

“What’s with this Donald Trump character?” asked a French friend over dinner.

“I don’t know,” we replied. “But at least he lives in the real world… or at least in his version of it. Not the make-believe world of most politicians.

“He has actually made money, in a real business. He has hired people and fired people. He has bills to pay. He has enough money so he can say what he thinks. And he hasn’t been in politics long enough to keep his mouth shut.”

 

151015104549-trump-bubble-780x439He knows a bubble when he sees one.

Image by Gwen Sung

 

What does Donald Trump think about the stock market? Investors, he recently told political website The Hill, are “being forced into an inflated stock market and at some point they’re going to get wiped out… We’re in a bubble right now.”

As far as we know, this comment is as honest and accurate as anything that has been said thus far in the race for president. But no one has a keener knowledge of hand grenades than the man who has had one blow up in his face.

“The Donald” knows a bubble when he sees one. And he knows what happens when it runs into a sharp object. In the exploding debris of 2009, he was knocked flat. Lying on his back, briefly, he was perhaps the world’s poorest man – with debts towering into the billions.

 

trumpThe Donald in mid-flight

Photo credit: Max Vadukul

 

Magical Mystery World

Today, Trump is back in the chips. The Dow is about 20% higher than its pre-crisis peak in 2007. Commercial property is also about 20% higher. In housing, the picture is a little more complicated. The average U.S. home price may be lower, but property prices in select areas are higher than ever.

This is partly because the rich and the insiders are using their ill-gotten (aka Fed-gotten) gains to compete for prize real estate… and partly because foreign buyers are coming into the market in a big way.

The Chinese, in particular, have become major buyers of U.S. real estate. A report often quoted on the Internet says Chinese people are buying 80% of the new houses in Irvine, California – hard to believe.

Since 2007, the combined size of global central banks’ balance sheets has tripled – reaching more than $22 trillion. (Meaning central banks have created that amount of money out of thin air to buy bonds.) U.S. stocks and bonds are worth $25 trillion more than their 2008 level. And the world is about $57 trillion deeper in debt.

 

central bank balance sheetsMajor central bank balance sheets – total and specific; note the decline in the PBoC’s balance sheet since foreign exchange flows have reversed (more details can be seen in this brief by Ed Yardeni) – click to enlarge.

 

In her magical mystery world at the Eccles Building (Fed HQ) Janet Yellen surveys all of this. She has never run a business. She has never even had a job in a profit-making business.

She cannot admit that there is a bubble – in stocks, bonds, or real estate. And judging from her performance in the run-up to 2008, she probably wouldn’t recognize one if it was right in front of her nose.

 

Debt-Fueled Fantasy

But at least she – like her predecessor, Ben Bernanke – has the cowardice of her convictions! Bernanke, in his new book, The Courage to Act, tells us that he “did not want to be remembered as the person whose decisions had led to the Fed’s destruction.

That’s right: The biggest challenge hits the Fed in 80 years and Mr. Bernanke is worried about his own reputation! He should have been steadfast. He should have let the barrel throw out its rotten apples. Instead, he panicked.

 

courageFinalBen Bernanke: First he panicked, and now he has the courage to cash in.

 

As he recounts it, he told the president, “[W]e didn’t think that the system – and more importantly, the economy – could withstand” the bankruptcy of the big insurance company AIG (Bernanke didn’t mention that AIG owed almost $3 billion to Goldman Sachs and that Goldman’s former CEO, Hank Paulson, was now in charge of the U.S. Treasury!).

A real economy is what you have when you undo the mischief done by central bankers, cronies, and regulators. It performs best when “creative destruction” is allowed to do its work.

The real economy would have applauded and breathed easier if AIG had gotten what it had coming. But “the system” Mr. Bernanke saved was not one of real commerce, industry, and capitalism. What he was worried about was the cockamamie, debt-fueled fantasy world he and his brethren at the Fed had patched together.

Under his watchful eye, it had gone too far. It had bubbled up on debt. Desperate to bail it out, Bernanke misinformed the president. And today we have the same system – with more or less the same crony parasites running the same flimflams with more debt than ever.

 

janet-yellen-determined-to-avoid-nightmare-scenarioAnd now, poor Janet Louise Yellen – a woman who reports arriving at the airport hours early because she is nervous about missing her flight – is in the captain’s chair.

Photo credit: Kevin Lamarque / Reuters

 

When in doubt, print more.

She must feel the same dread… the same fear. No central banker wants to be at the helm when their bubble ship hits the rocks. So, she steers for open water.

“Stocks rally, as 2015 rate hike appears more remote,” reports The Street.

 

Charts by: Ed Yardeni / Haver Analytics

 

Image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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