BUBBLES BUBBLES
TOIL AND
TROUBLES
There’s the Housing Bubble and the Commercial Office Space Bubble.
There’s the Bond Market Bubble and its two progenies, the Junk Bond Market
Bubble and the emerging Market Debt Bubble. There’s the $3.00 a gallon price you
see at the pump, which has all the markings of an Oil Bubble. And the premiums
being paid for all those corporate mergers and acquisitions are always coincident
with the top of a Stock Market Bubble.
In fact, nearly every asset market you can think of is showing signs of
bubble-like behavior. That is every one except Gold that while breaking out to
new 27 year high is being completely ignored. The reasons for this behavior are
quite clear: The global economy is awash in excess cash and credit that has been
“created out of thin air”. There is a tremendous amount of excess liquidity
around and it is proving very hard to get rid of it and the possibility of a
bursting Liquidity Bubble around the world should be of serious concern, but
nobody seems to have noticed or if they have noticed, they don’t seem to
care. To many analysts, this excess
liquidity is exactly what some of them erroneously expect is the savings of the
giant baby boom generation as they reach their peak earnings years and begin to
save more and more for their retirement. But the truth of the matter is that
the average retiree has less than $3,000 in the bank on the day of his
retirement. They are all mostly relying upon the government and if they are
lucky, their corporate pensions, which hopefully won’t be going bankrupt soon,
even though they are loaded up with CDOs and CMOs. The Governmen’s “cradle to
grave” campaign promises mentality has been bought hook, line and sinker by a
“something for nothing” gullible populace. The fact that the Government cannot
possibly meet all its promises has been demagogued
out of existence. We have neither a
Social Security nor any Medicare/Medicaid problem, President Bush is just a
liar…. Wish it were so. And if you think Bush and the Republican $ Trillion
(over 10 yrs) Drug Plan and the War were big ticket items, just wait until you
see what a Clinton, Pelosi, Rangel, Wright Spending and Tax Increase package will look like.
Most assuredly, the major part of the story is the ultra simulative
monetary policies of the central banks around the world. Ever since the Asian financial crisis in
1998, the Bank of Japan has been pumping out cheap money in an attempt to
revive the Japanese economy in a vain attempt to slay the Deflation Dragon. Isn’t
17 years enough time for the world to figure out doing more of what got you
into trouble doesn’t work. Before you can solve a problem, you must first learn
what the problem is. In the
The biggest culprit is probably the Central Bank of China which, in its
effort to prevent the appreciation of the Chinese currency, has had its printing
presses working overtime so that they can buy up all those dollars earned
through exports. CHINA IS A COMMUNIST COUNTRY trying to run a Fascist economy
of immense proportions with absolutely no experience and without the built in
signals that a Free Market Capitalist Economy has. Make no mistake about it,
FED maestro, Alan Greenspan, had argued that nobody can really identify
a Financial Bubble until after it has popped, which was his reason why the Fed
did little to try to stop the Stock Market Bubble from getting out of hand in
the latter 1990s. That has now been belied by any number of objective
indicators of the widening gap between the economic and market value of various
asset classes. Greenspan then, and Bernanke
now, are trying to engineer first a slowdown followed by a soft landing in
order to try not to have all of the bubbles pop at once. For some reason, they
never seem to realize that “the piper must always eventually be paid.” So far
the experts have only recently begun to admit that the Real Estate Bubble has
popped as they all try to convince us that prices will be back to normal by
sometime in 2008. Wishful thinking at best or out and out lies at worst. Popped
bubbles always turn into CRASHES. We have at least another 10 to 15 years to go
before this real estate market can stabilize.
The downtown office building market is still red hot in parts of the
country, even though nationally, there has been little or no increase in rents.
Most of the price escalation can be explained only by an expectation that price
appreciation will continue at its current pace. This is another perfect example
of the “Greater Fool Theory” since a normal positive return on capital cannot
be achieved through buying and then renting. Wouldn’t you know it, another
Banking Fiasco just waiting to come on the scene.
THE CREDIT BUBBLE has also popped, but nobody has admitted to
that yet. The world’s central bankers had to pump in over $1 Trillion,
virtually overnight, just to keep the world’s financial system from collapsing.
One Guru after another keeps talking about how Citicorp and Merrill are
becoming good buys now that they took their write offs and fired their
respective fall guys. They keep concentrating on their dividend yields and P/E
ratios. That’s looking in the rear view mirror. They have no earnings, only
more write offs coming and there will shortly be no dividends as the worst is yet
to come. My friends, “YOU AIN”T SEEN NOTHING YET.”
Phil Verleger, an energy expert, brings a
similar analysis to the run-up in oil prices, which he said is being driven
less by fundamentals than it is by the upward pull of Futures Markets that worries
about an
The current Bond Market Bubble is another warning that nobody is heeding.
All the experts are seeing only what they want to see; a FED that continues to
cut rates even in the face of full employment and a 3.9% growth in GDP. But the
Stock Market is not going up and since that is all they care about, they are
demanding more and larger cuts. Now we know that every Wall Streeter is always
talking about long term investment, but did you ever meet one that could see any
further than his next trade? Let the economy be damned, after all in the long
term we are all dead.
What they all refuse to see is that the FED has been printing money at
a 15% clip for at least 4 years and that is tanking our Dollar, which the “
hear no evil see no evil” gurus take as being good for our exports and balance
of trade deficits. Another very important reason and one you rarely hear
mentioned is the flight to quality by the super rich, who are more interested
in protecting their assets than they are in how much more money they can make;
especially given today’s valuations and risk reward ratios.
The “Carry Trade” is also completely distorting the world’s Bond Markets
which we no longer hear even being discussed. What everybody seems to have
forgotten is that this Bubble, which nobody knows just how large it really is,
must eventually be UNWOUND. But what will be the consequences as everyone tries
to get through the exit door at the same time?
A similar story is being told by the near record low spreads between
Treasuries and Junk Bonds – the interest-rate premium that borrowers have to
pay over “risk-free” U.S. Treasury Bonds. In the Junk Bond Market, spreads are
still near historic lows. In the market for Emerging Market Bonds, spreads that
once peaked at more than 10 percentage points at the time of the Argentine debt
crisis in late 2001, have recently fallen to an all time low of 3.3 %. Perhaps
worst of all is the fact that the FED has lost control of the money supply
since most of the new “out of thin air” money is being created outside the
American banking system by the near Banks and the Reserve Banks of Japan and
China as well as a host of other countries such as Australia and New Zeeland.
The financial experts can’t seem to learn the lessons of
Is it too much of a stretch to argue that stock prices have again
entered bubble territory? Certainly as a multiple of earnings, today’s prices
are higher than they have ever been except for the years 1999–2000. How strong can
earnings be if most of them are coming from massive cost cutting, layoffs and huge
share buy-backs (using borrowed money) with zero or even negative top line growth. There is a strong sense of “deja
vu” in seeing banks and Wall Street investment houses, up until the Bear Stearns
debacle, tripping all over one another to provide gobs of money on easy terms
to companies and private equity funds engaged in bidding wars for overvalued
companies. Takeovers are a cyclical phenomena and
since most never work out as projected, they must be spun-off in massive cost
cutting measures in their attempt to regain profitability. However, recently
even this market prop has virtually come to an end although the movers and
shakers are still refusing to admit that this game is over. POP! THERE GOES
ANOTHER MARKET PROP.
INFLATION
Is there anyone out there who still believes that inflation is only 2%?
I have recently been cleaning up my files and in throwing out my 1999 Income
Tax Files, I started looking through my bills and I noticed that everything had
at least doubled. It then wasn’t very hard to figure out that is a 10%
compounded annual Inflation Rate.
IS EVERYBODY HAPPY
? WHY NOT?
Don’t tell me that after three solid years of the best (without a
Crystal Ball) market forecasting you’re still not listening? The Stock Market and especially Gold have
been behaving almost exactly as expected and wouldn’t you know it: Prechter is still
calling for Gold to crash; lucky for us because as long as he and the rest of
Wall Street’s Gurus are bearish on Gold, this Gold Bull Market will continue.
THE STOCK MARKETS
I know it’s hard to believe that in the face of a crashing dollar, a burst
Real Estate Bubble, a Financial Credit and liquidity squeeze, Inflation that is
really between 10% and 15%, massive Budget and Trade Deficits and with the
Democrats now in control of both Houses with every likelihood of Hilary gaining
the White House (all of whom are calling for massive spending and tax increases),
and yet the Stock Markets are still within 5% of their all time highs. WHO’D A
THUNK IT?
Well, as Bearish as I am and as you all know I have been for some time
now, I think we might still have, after a possible test of the October lows, one
last fling into new all time high territory. Why? Because Market
Sentiment is still much too bearish for the “Top to end all Tops” to have been
made. But as I said before, I would rather shoot craps than play this
Top from the Long Side. I have been shorting into every rally for more than 6 months;
all those stocks that I think are in dire trouble such as the real estate
stocks, then the brokers and banks, then the buyers of all those CMO’S such as
Insurance companies and lastly, the suppliers of building materials. The short
side is a tough game to play and I warned you not to play it if you have never
done it before. Stick to buying Gold and sleep well. What good is having a lot
of money if you die from a heart attack?
THE MIDAS TOUCH
Those of you who have maintained your Gold positions and have added to
them on each decent (5%) pullback know what the MIDAS TOUCH feels like. For all
the rest of you that do not have Gold as your major position, I would suggest
very strenuously that you go back into my files and read all my missives on
RIDING THE GOLDEN BULL and all the others pertaining to Gold. WHY? Because this
GOLD BULL is still just beginning its middle stage. The most explosive 5th
stage is still 5 or 10 years away. If I still was on the outside looking in, I
would be scaling in starting NOW. For the rest of you Gold Bugs, the Big Quality
gold stocks have, as I projected, led the parade. The better of the mid-sized
companies are following nicely and its now time to start accumulating quality
juniors. The biggest risks and naturally the biggest potential rewards are the
ones in high risk countries which I personally stay away from, because there is
no telling what lengths politicians will go to cut their nose off to spite
their faces. But it’s your money. You pays your money and you takes your chances. Personally I
wouldn’t do it.
I could go on, but I think that’s enough BS for one today.
GOOD LUCK AND GOD BLESS.
Aubie Baltin CFA, CTA, CFP, Phd
Aubiebat@yahoo.com
561-840-9767