Post by brosin on Aug 15, 2010 20:28:00 GMT -5
“We’re Just Sitting Around Blowing Bubbles…”
Wednesday February 11, 2009 by Brosin
A few bubbles have popped. A housing bubble and various commodity bubbles have come and gone. Asset-class bubbles have burst as well with others soon to come; mutual funds lost 30-40% on the year while the hedge fund industry took its biggest losses in history during 2008 – in many cases, years worth of profits and retirement savings were wiped out. Pension funds (much larger asset class than hedge funds) and private equity funds have yet to deleverage and take realized losses as was so publicized in hedge funds in late ‘08.
Yet there are other – potentially more damaging – bubbles on the horizon. While the US Congress sits running around in circles trying to find out where the problems started (which really is a circle since they will only end up finding out it was themselves not to mention a whole host of other problems like the Ratings Agencies, but I digress), we are looking at bubbles in government debt not only in the United States, but in Europe and Japan as well. Interest rates have gone down as low as they can possibly go. Add to that an ever-expanding debt burden with each coming week’s worth of bailouts, stimulus plans, and backstops, and we have a scenario where inflation is inevitable when the global economy does start to recover. As with every past bubble, a collapse of the T-Bond bubble could mean a severe correction. This would lean more towards hyperinflation than inflation as demand for US debt dries up and the Fed is forced to print money to pay off even the interest rates on the *official* $10.7 trillion National Debt (see: fiscal gap which was calculated at $65.9 trillion even as far back in 2006 – I wonder what this would be now).
The “strong” US dollar as typically bubbles up in recessions is not very strong by historical standards, which signals that the lows for the dollar index in mid 2008 will soon be revisited and then some when the global economy corrects.
Gold is bubbling up as we speak, and this will likely continue to grow as uncertainty reigns king.
The most dangerous bubble has clearly shown itself this week (week of February 9), which you wont hear the pundits talking about. The government bubble is a new phenomenon, and it could probably just as well be named the Obama bubble (Obamubble?). There is an underlying theme lately that seems to be expecting the government to solve our problems. I myself fell victim to it at the peak of the panic. In retrospect, the government will not and cannot fundamentally solve our problems. They have done nothing but exacerbate many of the problems by throwing money at them. The leverage put on in recent years by pension funds, insurance companies, sovereign wealth funds, hedge funds, firms, and individuals was excessive and is now being removed. The government trying to salvage those that need to be removed does two things, neither of them good. First, it is a losing proposition, and the losses are placed on the future taxpayers. Second, it causes the good sectors where that money would have been used to become less safe, and potentially even pushes them into unprofitability as well. Since it is political season, it is clear why we as a populace have become so short-sighted. Yet even if one concedes that public demand taking the place of private demand now nonexistent is not the worst idea in the world, in the long-term, there is no way out of this problem that doesn’t involve the US Government and populace saving more and spending less. As it stands now, the Government is trying to plug the dam with (pun intended) bubble gum. Be careful out there!
US equities are likely to continue retesting the lows of late November in coming weeks as the global economy continues to deteriorate and hope in government plans falters. If the Dow breaks below 7450 and S&P 740, we could be setting up for another economic downwave and more bad news from stocks. There had been alot of bottom fishing at the year end as volume deteriorated and then became enthusiasm about the Obama stimulus plan. If the bottom fails, the money could just as quickly run for the exits. At 7000 on the Dow and 700 on the S&P, ride the wave back up before selling into the rally back near 8000. These are large moves, and currency markets lately have been on edge as all the Yen crosses have made new lows in 2009 as have many major global stock indices. The US should be soon to follow as the government hope bubble is burst.
Wednesday February 11, 2009 by Brosin
A few bubbles have popped. A housing bubble and various commodity bubbles have come and gone. Asset-class bubbles have burst as well with others soon to come; mutual funds lost 30-40% on the year while the hedge fund industry took its biggest losses in history during 2008 – in many cases, years worth of profits and retirement savings were wiped out. Pension funds (much larger asset class than hedge funds) and private equity funds have yet to deleverage and take realized losses as was so publicized in hedge funds in late ‘08.
Yet there are other – potentially more damaging – bubbles on the horizon. While the US Congress sits running around in circles trying to find out where the problems started (which really is a circle since they will only end up finding out it was themselves not to mention a whole host of other problems like the Ratings Agencies, but I digress), we are looking at bubbles in government debt not only in the United States, but in Europe and Japan as well. Interest rates have gone down as low as they can possibly go. Add to that an ever-expanding debt burden with each coming week’s worth of bailouts, stimulus plans, and backstops, and we have a scenario where inflation is inevitable when the global economy does start to recover. As with every past bubble, a collapse of the T-Bond bubble could mean a severe correction. This would lean more towards hyperinflation than inflation as demand for US debt dries up and the Fed is forced to print money to pay off even the interest rates on the *official* $10.7 trillion National Debt (see: fiscal gap which was calculated at $65.9 trillion even as far back in 2006 – I wonder what this would be now).
The “strong” US dollar as typically bubbles up in recessions is not very strong by historical standards, which signals that the lows for the dollar index in mid 2008 will soon be revisited and then some when the global economy corrects.
Gold is bubbling up as we speak, and this will likely continue to grow as uncertainty reigns king.
The most dangerous bubble has clearly shown itself this week (week of February 9), which you wont hear the pundits talking about. The government bubble is a new phenomenon, and it could probably just as well be named the Obama bubble (Obamubble?). There is an underlying theme lately that seems to be expecting the government to solve our problems. I myself fell victim to it at the peak of the panic. In retrospect, the government will not and cannot fundamentally solve our problems. They have done nothing but exacerbate many of the problems by throwing money at them. The leverage put on in recent years by pension funds, insurance companies, sovereign wealth funds, hedge funds, firms, and individuals was excessive and is now being removed. The government trying to salvage those that need to be removed does two things, neither of them good. First, it is a losing proposition, and the losses are placed on the future taxpayers. Second, it causes the good sectors where that money would have been used to become less safe, and potentially even pushes them into unprofitability as well. Since it is political season, it is clear why we as a populace have become so short-sighted. Yet even if one concedes that public demand taking the place of private demand now nonexistent is not the worst idea in the world, in the long-term, there is no way out of this problem that doesn’t involve the US Government and populace saving more and spending less. As it stands now, the Government is trying to plug the dam with (pun intended) bubble gum. Be careful out there!
US equities are likely to continue retesting the lows of late November in coming weeks as the global economy continues to deteriorate and hope in government plans falters. If the Dow breaks below 7450 and S&P 740, we could be setting up for another economic downwave and more bad news from stocks. There had been alot of bottom fishing at the year end as volume deteriorated and then became enthusiasm about the Obama stimulus plan. If the bottom fails, the money could just as quickly run for the exits. At 7000 on the Dow and 700 on the S&P, ride the wave back up before selling into the rally back near 8000. These are large moves, and currency markets lately have been on edge as all the Yen crosses have made new lows in 2009 as have many major global stock indices. The US should be soon to follow as the government hope bubble is burst.