It seems to me, whenever a bubble is expanding, articles are written by the smartest people in the room, excoriating those who are “loosing out” on the huge profits. The more the bubble grows the more shrill those pundits become. This is because a bubble is in reality a trick of perception. That is why so many are caught in them. We see easy money and the lure is too much for us to withstand, we are cajoled by those who are wallowing in money they “made” from the bubble, and we become jealous, moreover we convince ourselves that the bubble will inflate forever, and so we jump in. The result? People loose their hard earned savings, nations become bankrupt, wars are started and governments fall. History is replete with stories of epic bubbles and the chaos they wrought on humanity, yet the frequency and size of bubbles grows with every passing year. Your savings, your national budget and your very life is dependent upon you and your government learning this lesson, a leasson that has been taught so many times in the past.
Tzu Ssu said, “Everyone says “I Know” but they are driven into nets, caught in traps, fall into pitfalls, and not one knows how to avoid this…” Bubbles are a perfect example of what the sage meant in his “Mean in action.” Seeking great profits for little or no effort, certainly, by any measure, is not the mean in action! To follow the crowd into a trap is not the mean nor is running off a cliff. The wise avoid danger when a safe path is before them but a fool will jump at the chance to step into a bear trap. It is a sad quality of humanity that we are so. But that it is a quality of humanity doesn’t mean it must always be so. Tzu Ssu also said, “He [the enlightened man] preserves an easy mind as he awaits the will of heaven, (in contrast to) the man who is not true, who walks in perilous paths and hopes for good luck.”
When a pundit brings up the hundreds of trillion dollar bond bubble, other pundits will say, “I know,” but then argue how bonds are the safest investment. They will harangue others who have stayed out as loosing their client’s money and not taking advantage of opportunity. The harassment ratchets up if a bubble doesn’t burst when someone predicts it will, convincing the rest of the herd to believe it will expand forever. We convince ourselves we are missing a great opportunity and that if we stay out it will pass us by. Opportunity only knocks once you know. But is that knocking really opportunity… or misfortune?
The tulip bubble was a classic example. As the price of tulip bulbs grew so did everyone’s interest in them. The Dutch could be forgiven since bubbles were a relatively new economic phenomenon. They poured the national treasure into more and more exotic tulip bulbs. The more colorful and extreme the better. The bubble grew to encompass almost all the wealth of the people and royalty. The bubble expanded for quite a while, creating untold wealth… until it was discovered that the striations and many of the exotic qualities of many of the bulbs, was due to a virus and not genetics! Then the bottom fell out of the tulip bulb bubble. Overnight the wealth of Holland was lost. It took decades to rebuilt even a portion of what was lost.
How many nations on Earth are issuing more debt, debt that is rated AA or better, who are actually insolvent? Greece is rated junk bond status but still borrows money at absurdly low interest. The US is insolvent by many standards but pays essentially a zero interest rate, and some European countries are paying negative interest! Banks are required by law, to hold government debt, which lowers the rate of interest a government pays for racking up debt and creates a false shortage of bonds. Even as governments pile debt upon debt, central banks print money and hand it to banks to buy that debt. The machine works day and night inflating the bond bubble.
I am not saying the bond bubble will burst tomorrow, or even next year, I strongly suspect it will be held together, by central banks and other interested actors, until at least 2017 for political considerations. But, by their nature, bubbles are unpredictable. It could burst tomorrow or next year. There is really no knowing what will prick the bubble and cause it to burst, with all the negative consequences that humanity has suffered in the past. This bubble however dwarfs any that have preceded it. The collapse of the big banks that required a bailout for them, was fueled by a bubble created by central bank policies, and this bond bubble is only different in orders of magnitude. I know, I know, I am missing out on a great opportunity… to get driven into a net, caught in a trap, fall in a pitfall…