Posts Tagged ‘bubble’

Ben Bernanke and The Federal Reserve Money Factory

Thursday, December 3rd, 2009

golden-ticketOver the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.

Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.

Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.

For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.

Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.

Turning Ordinary Metal into Gold – The Modern Day Alchemists on Wall Street

Monday, April 20th, 2009

File:HermesTrismegistusCauc.jpgHundreds of years ago Kings and Queens where captivated by Alchemists who claimed to be able to turn ordinary metal into gold. Alchemist preyed on the wealthy to pay for their lifestyle and experimentation into this so called science of the time. By all accounts some alchemists where true believers, but more were just looking to dupe the wealthy out of their riches.

Today most of us view Alchemy as ridiculous and wonder how so many people in such great power could believe in it. Although today most of us think that the so called science of Alchemy is ludicrous, for some reason we still seem to believe that it is possible to turn ordinary metal into gold, figuratively.

This association was never more obvious than during the technology bubble 10 years ago. A person or group with just an idea was able to solicit millions from investors, before there was even a product. Most of Wall Street made speculations of wealth on the notion of near limitless growth which we now view as absurd. Even after those failed speculations we continue to put faith in Wall Street.

Looking at today it is understandable how the practice of Alchemy had captured the minds of yesterday for so long. As yesterday, on Wall Street there seems to be true believers and frauds (i.e. Bernie Madoff) in the art of turning ordinary metal into gold.

I do not believe all investment advice is the practice of alchemy. I will say though that the use of speculation in investment advice does seem to prey on mans’ fascination of turning ordinary metal into gold.

The mystery and lure of Alchemy was spread by stories from witnesses to this incredible act of turning ordinary metal into gold. It was not until the late 1700’s that this art of deception was revealed. A book was published on how these alchemists deceived witnesses. How many stories have you heard of someone who invested in a stock that made them extremely wealthy (i.e. Microsoft)?

Re-flation Trade! Really?

Wednesday, April 1st, 2009

What is a Re-Flation trade?

Since the US government has pumped so much cash into the system (increasing the US money supply), this should cause the devaluation of the US Dollar (supply and demand), which would in turn drive up the cost of Commodities causing a surge in prices of goods and services (since commodities are priced in the US dollar).


This fear is referred to as “hyper inflation”. So to trade this hyper inflation you should be invested in inflationary hedges (commodities i.e. gold, oil, etc). This phenomenon last occurred in the late 1970’s early 1980’s which happened to be the last commodities bubble. You should note though that interest rates (mortgages, credit, treasuries, etc) were extremely high (10 Year Treasury was at 15.84% in 1981 compared to sub 3% right now) during that same time period which is the opposite of today.

10 Year US Treasury Yield 1963 till 2009

10 Year US Treasury Yield 1963 till 2009

Commodities prices come off their bottoms over the past few months and the inflation watchdogs immediately brace for hyper inflation. Maybe we should actually read the story before jumping to the end. Sometimes the story is s more interesting then the ending.

The US government has taken these dramatic steps to ward off the threat of deflation. The opposite of hyper inflation would be a “deflationary spiral”. During a deflationary spiral prices of goods and services are falling to catch up with falling demand. A deflationary spiral causes high unemployment which actually accelerates the process (for more information see What is Deflation? ).

Instead of just looking at the prescriptions’ possible side effects, maybe we should look at the illness we are attempting to treat. Interesting how strong the dollar has been over the past year, since inflation would mean a weak dollar.

What Does a Market “Bottom” Look Like?

Friday, March 20th, 2009

If you watch any of the popular business networks on cable you will hear one word more than most, “bottom”. The term is used so frequently you could play a drinking game where every time says “bottom” you drink, I would imagine you would collapse after about an hour of playing the game.
So what does a bottom look like and why is everyone so anxious to make the call. Here are a couple of bubble market bottoms. One major distinction with these bottoms is that they encompass a full index.

nasdaq-bubble
The above is the NASDAQ from the late 1990’s to the early 2000’s. We all remember (well most of us) the hype that engulfed the technology sector that launched the NASDAQ to nearly 5000. The reason the NASDAQ reflects the bubble so well is because most technology stocks that were pumped up to extraordinary heights reside on the NASDAQ exchange. Notice that after the bottom was attained that the index did not rebound in weeks, it was slow and steady. If you had tried to buy as the knife was falling you may still be underwater today. Remember the NASDAQ only recovered to about half of its glory before the latest debacle.

dow-bubble-1930

The above is a chart of the Dow Industrial Average from the late 1920’s to early 1930’s. The bubble that burst in the late 1920’s is commonly agreed to be caused by a credit collapse (the world’s economies where in a similar dire straits as the US at that time, sound familiar). Since the US economy is based on expansion and contraction of credit, the Dow Industrial average is a good reflection of the pain felt by the US Industries. Again after the bottom is attained the rebound is slow and steady. Also if you attempted to catch this falling knife it could have been costly. Remember the Dow Industrial average did not return to its lofty heights of 1929 till the mid 1950’s.

My opinion is that the bottom will not feel like an opportunity, it will be a hard decision. You will be a minority among your peers and family when buying in.