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What Creates Bubbles & Why It Matters



As many of my clients know I have written extensively on the effects of money policy on the economy. Recently, BOTH the Chinese central bank and our central bank have just printed more money in the shortest period of time in history. So why does it matter? Well monetary theorists believe that when money is printed out of thin air, via central bank actions, the amount of currency in circulation increases. Well where does it go? The theorists (which we are one) believe its goes into certain asset classes and if printed in excess almost ALL asset classes especially risky ones. In sum, it can inflate asset prices. This is why, given unprecedented trillions upon trillions of money printed since 2009, the current environment is dubbed by some "THE EVERYTHING BUBBLE". When asset prices get bid up usually as a result of using leverage or debt tied to speculation it causes imbalances like the Internet Bubble and the Mortgage Bubble. If you can picture the world economy one big balloon what occurs if you keep on blowing more air into it? The first things that occur is the balloon sides become increasing stressed, developing weak spots, as the rubber gets thinner and thinner. As the pressure grows and more air is put into the balloon tears begin and then it pops. Same maybe true if you keep "blowing" more money in the world economy because it creates stress points (of one which was the REPO market in the FALL of 2019..see prior article on the that). The stress points created by the use of leverage eventually become unsustainable, giving way to cracks in the economic bubble that leads to a "pop" or a downturn in growth as the leverage can't sustain growth.


So when does it end IF we are in a bubble? Unlike prior periods where the private sector were largely the cause of the bubbles this one is being born by sovereign governments which can literally print money to keep feeding the debt. Meaning they have more resources to sustain it vs the private sector. This can last for very long periods of time until those same governments become insolvent and fail just like the private sector did in last two bubbles. OR when (like in Fall of 2018 via the US FED) stop or lessen the pace of printing money.


So how does one manage money in if these conditions do exist? With abundance of caution. In our prior posts we have outlined high cash levels and value dividend paying stocks as how we at BCA are managing client assets. No one can say IF we are in a bubble or how long it may last. But there are tell tale signs. Knowing what they are the keys and adjusting risk accordingly. Always this topic with your financial advisor about the potential risks to your finances.


At Brecken Capital Advisors we actively manage clients assets through the use of 7 proprietary model portfolios designed to match each client's risk tolerance with our views of the market & economy. We use a combination of ETFs and individual stocks with TD Ameritrade Insitutional as our custodian who does not charge trading fees. Additionally, we transparently measure both cost & performance for our clients. For more insights see our website and disclosures found there at BCA.