In 1966 the Fed was run by William McChesney Martin Jr. who famously compared the central bank to a chaperone that ordered the punch bowl removed just when the part was really starting up. Two years later a great inflation started that would last fifteen years. It would end in 1983 when Paul Volckers’ guidance would bring prices and the money supply back into order. Its’s nearly 40 years later, Biden is president, non rental housing is seeming all but unavailable to the recently married, and there are turbulent times in the stock market.
What gives? Let’s take a look at the economy from 30,000 feet. Bond yields have been unattractive for years, the economy has been Fed flooded with cash for years, and one of the hottest commodity is best described as virtual money.
I doubt Matt Damon likely know there were problems coming. I felt something was awry when I saw a commercial with Will Hunting, my favorite wise cracker ever, giving advice, and touting the future of cryptocurrency. He just didn’t seem qualified, maybe the image of him rearranging someone’s face had something to do with it .
In classic popular economics book Boom and Bust, authors William Quinn and John D. Turner lay a simple formula out for why we chase the hottest thing around until our wallets are empty; this is known as the bubble triangle.
The first side being the marketability of a product, that is how easily it can be bought or sold. This is compared to oxygen by Quinn and Turner, and this is kind of a mistake, but not a serious one. Not as much a flammable substance, oxygen lowers the burning temperature of substances around it. We’ll let that one go. Anyway, remember Matt Damon for this example.
Side two of the triangle, the fuel for the bubble is money and credit. As most people recall, the interest rate has been quite low in past years. If you are in the over 50 crowd, you recall, perhaps not quite clearly, how high interest rates were when we were younger. So, this is like our grandparents telling us a brother or sister died of a simple sinus infection. We question, how could this happen? They answered trust me, it happened, if there were antibiotics back before World War 2, they were tough to come by. This is akin to explaining to a twenty something that interest rates peaked at nearly 20%. It’s just hard to believe it ever happened. When I think of the second side of the triangle the movie Swingers comes to
mind; you’re money baby!
Side three of the triangle is the most interesting in my opinion. Analogous to heat, it is speculation. Speculation is purchase of an asset with a view of selling and possibly repurchasing an asset later. Once a bubble is under way, professional speculators, raiders, or even Greenmailers may purchase an asset they know to be overpriced, planning to re-sell the asset later to make a ‘greater fool of someone else and make a capital gain. This practice is known as riding the bubble, and especially in the 21st century has been made a democratic process with aps like Robinhood, and instances like the AMC stock saga. This process or bubble riding was immortalized in another ancient, yet great film named Wallstreet starring Michael Douglass as the greedy Gordon Gekko. At one point in the film, he says ‘greed is good’ in front of a room full of stock shareholders about to go for a ride. Laugh as much as you want, Gordon Gekko was as real a person as the president once.
So, how does a hedge play into all of this bubble talk?
A hedge is not a hedge fund. It is simply a form to put your assets in that will protect it from harm. More than diversification a hedge is something you have done your homework on and is hopefully Fed proof. In our opinion this would be real estate, both passive if you’re careful (funds like Fundrise are an option) and traditional. Another option is inflation adjusted series I treasuries from the US Treasury at TreasuryDirect.gov which will yield 9.62% until October 2022, interest compounded semi annually, and possibly an even higher yield later if inflation worsens.
The last thing you want is the economy, like an angry Matt Damon, sitting on your chest punching away at you.
-The Editorial Staff at Mitten Maid.