Cable Magic

Bubbles are notorious for only being clear after they’ve burst.

There’s never a shortage of people willing to predict bubbles, which makes me think that might be the the biggest bubble, in bubble-sighters. Current thinking seems to be that bonds are in a bubble, that we’re buying new highs in the price of US govvie debt based on nothing but the idea that they’re going higher still.

If true, this bubble has been a long time coming. When President Reagan charged Paul Volcker with the job of killing inflation, it set in train the virtuous circumstances we have today, namely, low interest rates and relatively acceptable liquidity. That was 35 years ago now. Seems to me that we’re just about where we should be given the initial aim.

The difficulty lies with the fact that we might have gone a little too far. Negative interest rates are such an odd phenomenon, and are now so common, that talk of bubbles and such is almost the easy way out. The reasons we got to this extreme place are well known; thank you JP Morgan, Goldman Sachs, AIG, Morgan Stanley et al, but that doesn’t help with the fact of it.

Markets often overshoot what appear to be reasonable stopping points or rest areas. They’re more like trampolines than much else, absorbing energy and sending it back in the other direction. Witness the cable. With stocks dipping for only a week after Brexit, it was up to the currency to absorb the damage, and it did so pretty well.

That’s the wonder of open, market economies. When stuff happens, the pressure can be relieved in many ways, with the effect that the energy from shocks doesn’t wreck too much. In this case, almost all of the damage was done to the currency, the beauty of which is that people’s daily lives aren’t horribly dislocated. That’s a very good thing.