The Viral Bubble
How a promising “per asper ad astra” narrative at the rock bottom of the COVID-19 crash got centrally diverted from a potential new dawn into an inflationary Pandora box going out of control.
ONE YEAR AND FOUR MONTHS have passed since the demise of the former Chairman of the Federal Reserve Paul Volcker, and this time — especially looking back at his fight against inflation — it seems more than eternity. After the most violent black swan in 20 years, despite the widening spread between a distorted financial dimension of exponential valuations and a real economy still in the grip of the COVID-19 pandemic, central planners prefer to keep ignoring the many structural cracks already compromising the base of what will probably be remembered as the Viral Bubble.
“… The specter of inflation will materialize sooner than later through the delivered massive wave of liquidity, spreading from equities to commodities, to every token transformable into Giffen good. This situation could well parallel the 80s, and it will be a time to remember Volcker’s battle in addressing the ultimate central issue.” (Apr 8, 2020)
One year on, and these words appear as the tip-of-the-iceberg for what trillions in massive stimuli have unleashed — an undeterred merry-go-around spinning over a dystopic stream of consciousness. The bubble has become a behemoth well beyond the new paradigm of innovation, an awkward Danse Macabre over the millions of deaths left by the plague. It is not just about beholding indices perpetually at new all-time highs, the whole structure — of what is still naively addressed as the “market” — is now drenched with the extreme allure of new augmented landmarks, thanks to which central planners passed from considering closing up the exchanges to the deliberate boasting about renewed dotcom multiples.
A full macro-fantasyland, where The Wizard of Oz is pretending to save the world by covering fundamentals with memes and cryptic magic, while a new legendary “Robinhood” is poised to be remembered for quite the opposite of what the ancestral one became famous for. And there’s a whole host of Hares and Mad Hatters with the brilliant idea—as “This time is going to be different!” — of having their passive management tea party in the middle of a centrally planned “Jurassic Park”, where instead of going after huge roaring resurrected dinosaurs, the safari is focused on chasing the soaring stocks resurrected out of the Everything Bubble — crashed in 2020.
Main Street has gone full Alice in Wonderland enthralled and tricked at the tea party. Even if she is offered apparent unlimited tea — unlimited “brrr” and unlimited stimuli — she is told she can have more than nothing, while most of it will end up — thanks to the same Alice — for keeping the illogical absurdity of the party afloat. The aberration of this perpetual all-in endgame is clear. She reluctantly allows in her own dream to let herself have little or no tea at all, as the non-sense speculation must go on.
“Mad Hatter: Would you like a little more tea?
Alice: Well, I haven’t had any yet, so I can’t very well take more.
March Hare: Ah, you mean you can’t very well take less.
Mad Hatter: Yes. You can always take more than nothing.”
The official narrative tells Alice there’s little or “no-inflation”— while in reality the price of commodities like grains, gasoline, lumber, copper or even electricity keeps rising — but she is forced to accept the undergoing tea party propaganda just to get by. Meme stocks, crypto, SPACs, NFTs, sneakers, sports highlight videos, tweets, anything with an apparent technological glistening is good enough to become a potential Giffen or Veblen good perfectly nested into the accommodative wonderland, where financial stability vulnerabilities are overall considered “moderate”. Treasury Yields rising, AAAs at risk, hedge funds getting hammered by herds of HODLin’ Hares and Passive Mad Hatters mastering the art of short squeeze, Enron-like electricity spikes blamed on climate change, firms trolling the monetary base by putting cryptos on their books (a milestone that at some point will fit as the perfect scapegoat for bans, as somewhere is already happening), massive redemptions seen at the mother of all funds investing in the most “disruptive technologies”, no other real central alchemy left other than deflationary NIRP and more cards from the deck to resurrect the animal spirits— TALFs, MLFs, MSLPs, PPPLFs, CCFs, MMLFs, CPFFs, PDCFs. “All moderate vulnerabilities.”
It is impossible to know if a younger Volcker—ignoring the fire of general critics — had already raised interest rates. The main concern for taking care of the “Fed put” remains in the tag price of the marketable speeches down the road. But at least a few strong voices raised their concerns along with Charlie Munger and Michael Burry questioning the fragility of a system based on the gamification of any security per se for the sake of a racetrack bettors’ mentality. The pandemic made everything viral; another time, the clincher has been turning the panic into a once in a century irrational exuberance mania through helicopter money. Quoting a tweet of the same Michael Burry:
“The #mainstreetrevolution is a myth…Zero commissions and gamified apps were designed to feed flows to the two most influential WS trading houses.”
As Munger said speaking at the Daily Journal Annual Meeting:
“That’s the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on race horses…the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And of course, when things get extreme, you have things like that short squeeze.” And so on “It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors.”
The Viral Bubble won’t be the ultimate bubble for sure. There is always another bubble. But way before that, at the next ground zero there’s going to be one final opportunity to recover the system in a more sustainable way, before that artificial intelligence becomes fully empowered to take over with an irreversible wonderland. Unfortunately, as it is happening with the blockchain-mania, it will be exploited till the moment to harvest around the perfect scarecrow, in order to garner brand-new central credibility.
Too far-fetched fiction? Hopefully, at some point in her journey “to the moon”, Alice will wake up.
“Who cares for you? You’re nothing but a pack of cards!”
But all good for now. All good till stocks are still in place of dinosaurs. All good till the sudden sound of thunder.
