David Hay: Bubbles ALWAYS Implode
Tom welcomes a new guest, David Hay, to the show. David is a long-time investor and author. He recently released his book “Bubble 3.0” which is a warning about the problems inherent in the financial system. The Fed being the main culprit for bubble creation, and such bubbles always get wrecked. The Fed has kept rates at great depression levels despite reasonable economic activity. He recalls not being negative enough during 2005 regarding the housing market, which blew up. David believes this time around will be similar and things will get quite bad.
We’ve had a wealth wipe out on par with the end of the tech bubble. Many stocks are down around seventy to ninety percent, but this time people are losing in stocks and bonds. People believe there will be another big rally, but he doesn’t see it soon. The environment of zero and negative interest rates is crazy, and we may have seen peak insanity.
Q.E. wasn’t inflationary due to a corresponding drop in money velocity. However, during covid, the money supply increased by forty percent and the government did trillions in direct fiscal policy. This money flooded the system. Imagine the inflation had the build back program been funded.
Preventing interest rates from being set in the open market is a form of price control, and that comes with many unintended consequences. The Fed is on a warpath to get interest rates to 3.5 percent and control inflation. Paul Volker could do it because the GDP was much higher in the 80s. Today, rates in real terms we are still at negative two percent. Powell has a very difficult path ahead of him.
We’re not quite in a recession yet due to various base effects, but it will be hard however to avoid one.
The next Fed pivot will likely see everyone jump back into the markets on good news. Inflation is likely to be with us for some time, and we will continue to see a commodity bull market. Especially, with the demand for electrification in vehicles. Copper prices doubled, but we never saw any new mines open as a result. We’re in the first period where existing energy is being replaced with less effective solutions.
The Fed can’t print copper, but they can set expectations and try to destroy demand. He believes earnings estimates are too high, and those targets will be missed.
Banks are reporting fairly good activity at the consumer level, but things are likely to get harder. We’re going to see another period with exploding deficits, and eventually the Fed will have to monetize again.
He discusses the difficulty in picking miners and why for most investors the ETF indexes might be better.
Talking Points From This Week’s Episode
- Why the Fed is the cause of all bubbles.
- Fed’s attempts to control inflation via stifling demand.
- The unintended consequences of controlling interest rates.
- Picking miners and the impact of green policy on energy.
Time Stamp References:
0:00 – Introduction
1:06 – Peak Insanity
6:46 – Inflation & Q.E.
10:40 – Rate Controls
13:48 – Fed & Politics
16:32 – Recession Now?
18:48 – Fed Pivot?
25:02 – Commodity Supercycle
29:10 – Lending Standards
33:45 – Social Security
34:51 – Treasuries & Russia
36:18 – Deglobalization
37:48 – Environment & Energy
42:58 – GreenFlation & Oil
49:03 – EROI Concerns
51:21 – Algos & Energy Equities
53:58 – View on Gold & Fiat
57:30 – Finding Miners
1:00:06 – Canada & Australia
1:01:20 – Concluding Thoughts
David Hay is a longtime investment advisor and financial author from Bellevue, Washington. He and his wife, Mindy, now split their time between the Northwest, Southern California, and a few places in between (their two dogs love long road trips). They have six grandchildren, three of who live on the West Coast and three on the East Coast. Dave is desperately hoping for a better world for his grandchildren to grow up in than the one we have right now. In that regard, Dave is an ardent supporter of No Labels, a bipartisan political movement that currently includes roughly 70 members of Congress. He is the recently appointed Co-Chairman of No Labels’ Washington State organization. You can find his financial writings on his substack linked above on a weekly basis.