Jan. 5, 2022

Are We In A "Melt-Up Boom?"

It's the question that I find myself asking nearly every day: are we in a melt-up boom?

First a little background. A melt-up boom is a sudden, unexpected rise in the price of an asset. It is, from my point of view, largely a psychological phenomenon. When investors are driven by emotion to bid up the price of an asset, not based on the fundamentals, but based on pure emotion. A “got to have it” feeling. Which, if you've ever experienced it, can be overwhelming.

It's FOMO, pure and simple. That “Fear of Missing Out.” The feeling that if I don't invest in this asset, I'll lose out on a great opportunity.

I believe that this is part of what has driven the extreme asset appreciation in the crypto markets for example. We've also seen this "Fear of Missing Out" on the price action of some of the major companies on the exchange.

Most recently in the extreme volatility of a company like Tesla. Where it's apparent that investor psychology has swung between greed and fear and back again on several recent occasions.

In other words, we've seen Tesla's stock price first melt-up and then meltdown. Only to return again.

It's relatively easy to see this phenomenon in an asset, like Tesla or Bitcoin. But what if we're seeing this melt-up phenomenon in an entire economy?

What if the US economy is currently going through the Melt-Up Phase?

When you look at the numbers, it's hard to deny that this economy is experiencing that sudden, unexpected rise in prices that is the dictionary definition of a melt-up.

In the 11 months that Joe Biden has been President, Inflation, that is the price level of the economy, has risen each and every month. For the nation's central banker, the Federal Reserve, this has meant that they've gone from fighting deflation under former President Trump to now fighting inflation under President Biden.

The nation has never gone through such a marked and rapid transition from monetary deflation to monetary inflation.

And it's been totally unexpected. That's why for the first several months on this new inflation, the Fed simply denied it existed. More precisely they claimed that the new inflation was “transitory” to use their words. They simply couldn't believe it.

In other words, unexpected melt-up.

Something that had come “out of the blue.”

Now to the shrewd observer, it likely wasn't so out of the blue. Perhaps you were one who saw this as a natural result of the $9 trillion in stimulus spending and 40% or more increase in the money supply, that has occurred in the past year.

And here is the key: if what we are seeing is indeed a melt-up, then it is probably not sustainable. It is the illusion of wealth, but not real wealth. Simply a rise in price, not a rise in value, like we say around here.

As a nation, we've gone on the biggest spending binge in history. Spending $9 trillion that we didn't have. Melting up prices, the stock market, real estate, to levels never before seen.

We're on the top of the mountain.

From here there are two paths. We can tighten our spending, buckle down to the hard work that will be needed to pay off that debt. And return to a self-sustaining financial system.

It will take hard work, and positive economic policy to return to pay as we go economy. And it may take a complete re-education of many in Washington on what Capitalism really is.

Or we can simply kick the can down the road. And hope that the meltdown occurs on the next guy's watch.

Right now it's Washington that controls our economic destiny.

Our current problems are not insurmountable. But they will take hard work and sacrifice. Something that isn't very popular up on Capital Hill. Over at 1600 Pennsylvania Avenue.