No

Bubbles

Yellen 

Fed's Yellen expects no new financial crisis in 'our lifetimes'

Generational Dynamics

This is such a bizarre, naïve statement, that it's hard to know what to make of it. Yellen is expressing precisely the attitude that's always been prevalent prior to every financial crisis in world history. Politicians say "This time it's different," and "We've learned our lessons," and "It can't happen this time." And it doesn't happen this time, until it does. 

Actually, the lessons from the last financial crisis haven't been learned at all. The Fed and central banks around the world have been "printing" hundreds of trillions of dollars, and governments around the world have been borrowing that money and going into new debt at an exponentially increasing rate. We've recently been reporting that it's too late for Illinois and Puerto Rico, which have gone into so much debt there's literally no hope of every paying it off. 

This is true all around the world. According to a new report by the Institute of International Finance, global debt has reached $217 trillion in the first quarter of this year, and that's 327% of gross domestic product for the whole world. 

China in particular poses an enormous risk. China's total debt surpassed 304% of GDP as of May 2017, according to the IIF. 

Janet Yellen apparently believes that all this is no problem, that if a problem does arise, then the Fed or some other central bank can just print another trillion dollars in free money and use it to patch up the problem. So we have nothing to worry about.

Stock Market Bubble

There are many reasons why I believe that mainstream economists are airheads, and one of them is the belief that you can't detect a bubble until after it occurs. In the case of the DJIA, it's rather simple. If you analyze historical values of the DJIA, you find that in the 90-year period from 1904 to 1994 it grew at an average of 4.5% per year, including inflation. So since the DJIA started growing much more rapidly than 4.5% per year, starting in 1995, the you know that it's in a growing bubble. Today, the DJIA is at 258% of its long-term trend value, as determined by the 4.5% growth rate, so we can be sure that the DJIA is in an enormous bubble. In fact, it was at 255% of the trend value when the crash began in 1929, and fell to only 24% of the trend value by 1932, after several years of crashing. 

Another thing that mainstream economists are incapable of grasping is the concept of "Reversion of the Mean." This means that the average (or mean) of a value must be the same in the future as it was in the past. 

This is easiest to explain with the S&P 500 Price Earnings ratio (p/e ratio). The historic average value of the p/e ratio is 14, but since the 1990s, it's been well above the average, and today it's around 24. 

Now, airhead economists use the erroneous phrase "Reversion TO the Mean," and they say you should be prepared for the p/e ratio to revert to its mean value of 14. This would be a significant stock market correction, but it's only a small part of the story. 

If the p/e ratio only reverts to 14, then that means for the last 20 years, the average (or mean) value was well above 14. That doesn't satisfy the requirement that the average before 1995 was 14, and so after 1995 it also has to be 14. That's why we say "Reversion OF the Mean," which says that the average value must return to 14, which means that the p/e ratio would have to fall to around 5 for 20 years, just as it was well above 14 for the last 20 years. This portends major stock market crash. 

The members of the Federal Reserve are some of the major economists of our time, each with huge staffs to do research. And yet, Janet Yellen says that the Fed has everything under control, and there won't be a financial crisis "in our lifetimes." It's just absolutely bizarre.

DYI