Lacalle: The bubble of everything causes stocks to crash

Inflation is driving an unprecedented stock bubble to burst … according to well-known economist Daniel Lacalle …
As he points out, during the period when central banks were enjoying a “creeping” control over consumer prices, they practiced very loose monetary policy, resulting in massive inflationary pressures.
So in the era of quantitative easing, Bond prices Stock valuations have skyrocketedhome prices Significantly increased above levels of affordability and pMultiples (P/E) for venture capital and private equity rose to historically high levels…
Bloomberg’s US House Price Index is down 20% since the start of monetary tightening, while explosive home price inflation is a clear sign of capital destruction.
Monetary deflation causes asset prices to fall, which then leads to a revaluation of the asset base in financial firms: from banks to venture capital firms.
The importance of capital destruction in trying to rein in inflation is often overlooked.
Economists tend to believe that there is little correlation between the prices of everyday goods and services and the valuation of financial assets because many readily dismiss the monetary cause of inflation.
However, the increased ratings are also a monetary phenomenon.
In the same way that inflation of financial assets precedes consumer prices in periods of monetary expansion, capital destruction occurs earlier than CPI inflation decreases in periods of monetary contraction.
Without significant reductions in financial assets, it is very difficult to see a real deflationary process.
Why; Because increased valuations of financial assets lead to more flexible lending standards, satisfied levels of credit growth and an increase in consumer prices.
When central banks become lenders of first rather than lenders of last resort and shift their focus from inflation to “financial stability” in the form of keeping asset prices (stocks, bonds, homes) high, they abandon lower consumer prices as the goal.

Role…

The role of central banks is not to keep stocks, bonds, and homes from rising, much less to prevent a physical correction.
You might say that central banks do not aim to raise the prices of financial assets, but the evidence supports the opposite argument.
Central banks care about the markets because they believe in the effect of the effect of wealth on the real economy.
When people feel that their homes are more valuable and their stocks are more valuable, they tend to spend more and take out more loans.
This wealth effect is also evidence of what I said earlier: financial asset prices cause an inflationary boom, and only the destruction of capital with the same asset prices can lower the prices of goods and services.
The problem arises when central banks ignore exaggerations in the financial markets for a long period of time.
When such a situation arises and we witness, as we did in 2020, the “everything bubble”, it becomes increasingly difficult to fight inflation without fear of the financial markets.
The collapse of some regional banks in the United States is evidence of the destruction of capital.
The asset base is rapidly shrinking, deposits are leaving and unrealized capital loss is greater than capitalization.

amount of money

The massive increase in money supply triggered the inflationary boom of 2021-2022.
Recent results for Borio (2023, BIS), Hanke (2020) or Congdon and Shaw (2023) Show the clear causal relationship of inflation with the increase in the amount of money much higher than the real GDP.
We are now seeing the exact opposite effect.
Money growth is waning, credit payment is fading, and capital destruction manifested in falling asset prices is starting to be a leading indicator of a sharper slowdown in the economy.
Central banks are unable to plan a soft landing for the economy, because they have created a huge bubble that requires large writedowns in most financial companies and a credit crunch combined.
Lacalle concludes that the bubble of everything leads to collapse and the destruction of capital will be the main indicator of deflation.

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