Deferring Recession: A Short History of the “Age of Bubbles”

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The Dow fell 41 points yesterday…for no particular reason.

Gold went up $9…again, for no particular reason.

So, we will continue our description of what is really going on…for no particular reason other than curiosity. And self-protection. And personal enrichment. And bragging rights.

Future historians, when they finally get a grip on it, will no doubt dub our time as the “Age of Bubbles.”

The feds created a bubble in the ’90s – a bubble in tech stocks. That bubble was driven not just by the US feds…but by the Japanese feds too. The Japanese were in a major correction. They tried to get out of it using the same old tricks – cheap money, deficit spending, massive borrowing and even QE. This led to the “yen carry trade,” in which speculators borrowed yen at zero interest rates and invested the money in the hot market of the time – Wall Street! It was the go-go dot.com era.

The Dow bubbled up…and then popped.

We thought – wrongly – that the game was over. We expected stocks to go down, down, down…until they finally reached a trough at real values. Then, with the mistakes wrung out of the system, and equities at good prices, a new bull market could begin.

Instead, the feds stalled the correction, reversed the bear market, and created an even bigger bubble – this time in housing and finance. The US feds followed the Japanese model. Faced with even a feeble recession, the Fed dropped rates to below the level of consumer price inflation – and left them there for years. The Bush administration, meanwhile, took the budget deep into deficit territory.

Do you remember the “Recession that Wasn’t”? That was the failed mini- recession of ’01. The authorities attacked it with so much new money and credit it was over before it had barely begun. Consumers kept borrowing and spending. Investors went right back into the stock market. Speculators moved on to the next hot market.

This time speculators borrowed to buy mortgage backed securities – and derivatives that only the mathematicians seemed to understand.

Result: Bubble II. After tracking inflation for nearly 100 years, house prices suddenly doubled. The Dow went over 14,000. Wall Street went wild.

This bubble sprang a leak in ’07. By ’09 it was losing air fast.

Once again, the feds got out the pumps. We’ve been following the story for the last 5 years…and yet another bubble is taking shape.

Food prices are rising so fast they are causing riots. Gold is edging back up towards $1,400. Stock prices are still going up too – nearly 2 years after the rally began on March 9th of 2009.

David Rosenberg explains (in The Financial Times) what it means for the stock market:

Just as the prior bear market rally was built on a shaky foundation of unsustainable credit and house price appreciation, the current bear market rally has been built on an even shakier ground of surreal public sector intervention.

But no use telling investors. They go for whatever is hot. And stocks are hot. Commodities are even hotter.

Practically everyone believes that the economy is recovering…inflation rates will go up…and that the hot markets will get even hotter.

“Don’t fight the Fed,” they say to one another. And everybody knows what mischief the Fed is up to. It used to be a crime to print money without any backing whatsoever. Now, the Fed is doing it in broad daylight. It’s pledged to add $600 billion to the nation’s monetary base before the end of June.

“If that ain’t a guarantee of more inflation,” says one investor to another, “I don’t know what is.”

But is it? Has there ever been a bubble that hasn’t popped? Not that we’ve ever heard of.

Stick with the program, dear reader…sell stocks on rallies (like this one)…but gold on dips.

That was our advice for the last decade. It’s still good advice.

Or, if you want to move into this decade’s advice, here’s the formula:

Sell Japanese government bonds on rallies, buy Japanese small cap stocks on dips. The bubble in Japanese government bonds will blow up too. When it does, Japanese investors will rush to low-priced equities. Count on it.

Okay, so it’s a little harder to do. But who said investing was going to be easy?

And more thoughts…

“Bill, what the hell are you doing up there?”

“What does it look like I’m doing? I’m pruning the apple tree.”

“With a chainsaw?”

“Well… They were left alone for so long. Now, you need a chainsaw to cut out these big limbs.”

Our cousin came over to visit on Saturday. We were working in the orchard when he drove up.

“Billy…you are supposed to be a smart boy…but you do some dumb things.”

“Hey…I gotta prune the trees…”

“How many times have you fallen out of the trees?”

“Only twice…”

“I rest my case… That’s the trouble with smart people; they don’t have any common sense. Using a chainsaw is dangerous enough. You should never do it when you’re by yourself. And especially not when you’re climbing around in wet trees.”

“Elizabeth is coming over later…”

“Great… She’ll look for you in the orchard and find you lying on the ground in a pool of blood.

“I guess she could sell the story to 1,000 Ways to Die… Heck you’ve found a new dumb way to die… You slip on one of the boughs when the chainsaw is running…

“They’d probably call it ‘A Very Painful Bough Movement’…ha ha…

“Seriously, you shouldn’t be doing this… You should hire some El Salvadorians. They’re good workers. They’d have this orchard cleaned up in no time at all.

“Isn’t it funny how we talk about different groups? In the old days, Uncle Edward would say, ‘I’ll send over a colored man…’

“You can’t say that anymore. And you can’t find a ‘colored man’ to do this kind of work anymore.

“We spent nearly our whole lives trying to get away from these racial stereotypes and now they’re more common than ever.

“Everybody says the El Salvadorians work a lot harder than the Guatemalans, for example…

“And you sure wouldn’t call a group of Jews to prune your trees. And you sure wouldn’t hire a group of Irishmen to guard your distillery, would you?

“I guess each group has its own specialty.

“I want an Asian doctor. A Jewish accountant. And a hotel run by a guy named Patel.

“And I’d sure as hell get some El Salvadorians in here to help you work on this orchard.”

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. “Gold is edging back up towards $1,400”

    Gold was $1,400 two years ago when the ossie buck was what? 55 to the us buck. Buy the dips? Haha! Good Luck.

    But, “it’s diffrent ‘ere”.

    Reply
  2. “Good Luck”…thanks nv ;)
    Yes our commodity currency is strong and will suppress gold somewhat, but its not infallible against gold. The move up two years ago to 1550 approx was from 900 approx in 6-7months. That’s a monster move (70%) in a very short time against a “strong currency” and a number of years to consolidate such a move would be expected.
    True however nothing is guaranteed about the next move but everything is a gamble now…it always was.

    Reply
  3. Citibanks Exter began buying gold at $35…shame he didn’t live to see 1500.
    http://www.istockanalyst.com/article/viewarticle/articleid/2599701

    Yes, I’m a dedicated gold troll. :)

    Reply
  4. @ Lachlan Focus performed well today

    My bolivian one retreated a little (9% or so)
    as did Fletcher Christians

    Stillgotshoeson
    February 17, 2011
    Reply
  5. Gidday Shoes. I’m very happy with Focus. Breaking away with increasing volumes so I hope a firm move now towards an intra-day 8-9cents approx before some more consolidating.
    Anyhow the metals/commods etc seem on the way up again but I’ll be happier still when recent highs are taken out.

    Reply
  6. Comment by Lachlan on 17 February 2011:

    “a firm move now towards an intra-day 8-9cents approx before some more consolidating.”

    Yes I was thinking along similiar lines, a push then onto 12 cents is a possibility after a short consolidation period.

    They carry a large number of shares, I am expecting a consolidation of somewhere between 1 for 6 and and 1 for 10 this year.

    Next drill results will be out next month or early April.
    Taking the kids and the car on the Spirit Of Tasmania to do some 4WDing in Tassie over the school holidays in April.. Won’t be watching the market those 9 days (2 nights on the boat) 7 days in Tassie.

    Stillgotshoeson
    February 18, 2011
    Reply
  7. “Taking the kids and the car on the Spirit Of Tasmania to do some 4WDing in Tassie over the school holidays in April..”
    Good one Shoes. Give the kids and yourself some great times to remember mate. What else are we making money for eh.
    FML will go much higher in time I think. In fact I think gold stocks are on the cusp of a huge move.
    I may be doing quite a bit of stocks shopping soon Shoes before the end of year good times start to roll. Not worried about the effect of broad market pull-backs on these. Few more small caps and a couple of medium/big timers…although not well researched on latter yet.

    Reply
  8. Comment by Lachlan on 18 February 2011:

    FML will go much higher in time I think. In fact I think gold stocks are on the cusp of a huge move.
    I may be doing quite a bit of stocks shopping soon Shoes before the end of year good times start to roll. Not worried about the effect of broad market pull-backs on these. Few more small caps and a couple of medium/big timers…although not well researched on latter yet.

    2 of my research tools have FML at 12 cents and 27 cents
    NCM is the big to have if you want exposure to a big gold miner.. 20% to 25% gain this year is not unrealistic for them.. much much more when the bull run on gold occurs.

    Mid Tier I like SBM.. They have spent the last couple of years paying down debt, expanding and consolidating share base.. Zero debt, 325 million shares or so and better than 200000 ounces a year production (and growing) should be good for them.. Their recovery cost per ounce is quite high compared to many other gold miners out there however stability of being in Australia and a huge boost to gold in AUD coming I think they are worth some exposure.

    I made 50% on Citigold last year and have them on my watch list for this year as well for another buy/sell at a profit opportunity. With that Chinese company putting up $30m to explore the Charters Towers Tenements the prospect of further Gold being discovered is quite good.. Citigold struggle because it costs a fortune to pull that gold out of the ground, coming higher gold price in AUD will make it a little more appealing + further gold discovery make them worth watching for buy/sell opportunities, not a stock I would “hold”
    I am currently holding 12 Stocks.. 8 of them are Gold or Copper/Gold miners, some Australian based some not.

    Stillgotshoeson
    February 18, 2011
    Reply
  9. NCM was another buy for me on the last dip Shoes… which I couldn’t proceed with. Rats, it’s up a couple dollars. SBM, thanks for heads up. I looked at it 18months ago and didn’t like something about it. But now the chart looks good to go. Will study fundamentals later on.

    If a 2008 style sell-off arrives on these Shoes I wont be liquidating. Thats part of my plan. Of course I don’t expect it will happen.
    Noted you are playing this game differently with stop losses which all makes sense. You are heavily invested. My risk management is based on limited position sizes. I don’t have the cash to go big anyhow. Lets hope for a continued bull run now. Cheers Shoes.

    Reply
  10. Comment by Lachlan on 18 February 2011:

    NCM was another buy for me on the last dip Shoes..
    I bought some yesterday

    which I couldn’t proceed with. Rats, it’s up a couple dollars. SBM, thanks for heads up. I looked at it 18months ago and didn’t like something about it. But now the chart looks good to go. Will study fundamentals later on.
    Bought $46000 worth of them 17th May last year, still holding

    If a 2008 style sell-off arrives on these Shoes I wont be liquidating.
    Treat a sell of as a chance to increase holdings and lower dollar cost average of purchases

    Thats part of my plan. Of course I don’t expect it will happen.

    A sell of before the next up is a possibility
    Noted you are playing this game differently with stop losses which all makes sense. You are heavily invested.

    Stop losses are raises as value increase.. Price reaches my sell price, I sell and look for other opportunities or buy back in on a dip.

    My risk management is based on limited position sizes. I don’t have the cash to go big anyhow. Lets hope for a continued bull run now. Cheers Shoes.

    Some I have $50k or more of some less than $10k

    Stillgotshoeson
    February 18, 2011
    Reply
  11. 80’s joke. I wished for a Japanese wife, Chinese cook, American income, English home. I ended up with a Japanese home, Chinese income, American wife and English cook.

    DRA goes on about the evil Fed.
    heres how the Fed and all else in the crooked system is actually big business.
    http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

    one of the comments “I would enjoy hearing a libertarian explain how none of this would happen under their free market system.”
    just a contrarian thought again.

    Reply

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