Three Bubbles/Strikes and You're Out

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Three Bubbles/Strikes and You're Out

So perhaps we can say that the conventional investment wisdom holds that any asset bubble that bursts will quickly be reflated into an even more extreme asset bubble. That's certainly been the history of the past 17 years. 

Central banks don't control the consequences of their policies. If they respond to the popping of the current bubble with tens of trillions in new asset purchases, they might find this policy is nowhere near as effective as when it was unleashed in 2008. 

Once markets grasp that central banks have lost control of the consequences of their policies, confidence, faith and trust in central banks "saving the day" will evaporate. The likely result of this realization is that markets will plummet to new lows rather than reach new highs. 

Three bubbles/strikes and you're out. Those betting on a fourth bubble of even greater extremes will find their time at bat has come to an end.

Druckenmiller: Central banks are financial world's 'Darth Vader,' creating exploding asset bubbles

"Deflation just doesn't appear out of nowhere and it doesn't happen because you are near the zero bound. Every serious deflation I've looked at is preceded by an asset bubble and then it bursts," he said. "Think about the '20s, a big asset bubble that burst, you have the Depression. Think about Japan. Asset bubble in the '80s. It burst. You have the consequences follow. Think about 2008, 2009."

DYI:

Mr. Market will have his day for in the end he is more powerful than all of the world’s central banks combined.  Stocks, bonds, and real estate (RE especially outside of the U.S.) have been blown to valuation levels beyond the stars. 

Mr. Market whether caused by an absence of confidence or privation of buyers these 3 asset categories will not only revert back to their means but blow past them!  DYI’s expectation for stocks from peak to trough over many months is a decline in the magnitude of 55% to 70%!  Stocks held or purchased today go to sleep like Rip Van Winkle awaken 12 years from now your estimated average annual rate of return is – drum roll please – is negative 1.59%!  Of course this is all before fees, commissions, trading impact cost, taxes, and inflation.  Factor those in and depending upon whether these dollars are in a pension or not returns could be as low as negative 6% per year for 12 years.  So…Hold onto your hats and cash better values are ahead!

DYI