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Are We In Another Bubble?

July 22, 2013

As you can all tell, I don’t have much to say these days. I feel nothing has changed and I am unable to see what is convincing the markets that “all is good!” I am sticking with my October 2012, Money Aplenty thesis. There is way too much liquidity in a far too confined space. All this money is searching for places to make a return, which equates to chasing yields and risk. This all works as long as the pyramid scheme does not begin to show that it is stalling out. People make lots of money in pyramid schemes — until they don’t!

It seems that the real issue is that as hard as the Fed attempts to spur inflation, it is not succeeding (at least if you look at official inflation measures). The reason they are not succeeding is the product of extremely low money velocity (rate at which money circulates, changes hands, or turns over in an economy in a given period). The reason money is not changing hands is because the Fed is giving it to those who were highly leveraged (Wall Street banks), who saw they were staring into the abyss back in 2008. These money changers should have gone bankrupt, but their salvation came in the form of government bailouts and the Federal Reserve’s outright rigging of the investment complex and interest rates.

Trillions of dollars have flowed from the Fed’s printing press directly into Wall Street, helping prop them up and saving them from bankruptcy, but they have not moved the money around in terms of old-fashioned loans. Instead, they have turned their business into a bigger casino — and casinos do not make a habit of staying in business by allowing much money to leave their casino.

I get asked often whether we are in another bubble, and how people should invest.  The answer is that absolutely this is another bubble — or — it is the beginning of very high, and most likely, long-term inflation. The problem is if this is a bubble, you would want to be very heavy in cash. But if this is the beginning of Fed-induced, out-of-control inflation, you would want to be in about anything but cash and preferably physical assets.

My gut, and nothing else, tells me that we could experience a head fake. What I mean is that we might see investors trying to time this bubble resulting in a rush for the exits (liquefying investments) and then, after a time of damage that might look like we are repeating 2008, inflation will kick in, leaving the average investor “high and dry.”

The real issue in my opinion is what happens to money velocity. If it breaks loose, is it like a dam breaking? The best image I could paint is the picture of the Fed pouring unprecedented amounts of money (liquidity) into Wall Street (the dam). The pressure is mounting behind the dam and when money velocity begins to move to regular levels will the result be very high inflation? If this is the case, bonds get blown to smithereens, equities likely go up but probably do not keep up with inflation, and physical assets really launch. And Main Street will struggle meeting their essential needs due to the cost of essential goods (food, fuel and energy).

This is all theory and conjecture on my part, but it is worth thinking about — and it is what I will tell you if you ask me if we are in another bubble.

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2 Comments
  1. Steve Egan permalink
    July 31, 2013 8:31 pm

    I agree. This is the administrations effort to dumb down our economy to be equitable with the third world by pumping billions into circulation. He wins on paper with increased imported goods, we lose by a substantially lower standard of living.

  2. Wayne permalink
    August 1, 2013 12:02 pm

    I know everyone cautions against fighting the FED, but the market has proven over time to be stronger. So keep an eye on the ten year bond if it moves to 3% and above, the FED may have lost control allowing the bond vigilantes to push rates higher. The FED will have no choice but to follow.

    That will lead to rates increasing quickly without much notice, sparking a corresponding downturn in the real estate and stock markets.

    I don’t believe the FED has enough control over world markets to manage a controlled easing of Q.E. and bond rates as Bernanke has suggested. Eventually, the markets will force higher rates in spite of any plan the FED purports, because the market will demand higher rates to offset higher risk. The FED will basically have little, if any, ability to affect rates.

    We can all look back at history and score the FEDs ability to predict, plan and control the economy. Their track record has not been good!

    Central banks world over seem to be in a race to oversupply the their respective countries with fiat currency and maintain low interest rates to spur inflation. Unfortunately it won’t work. As in the past they will make a mistake or over extend and lose control to the markets.

    I am not talking armageddon or dooms day, but there will be a severe downturn in equities and corresponding significant increase in interest rates. So keep a sharp eye on those ten year rates!

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