Great Depression Online Archive Issue:

The Mother of All Bubbles

Great Depression Online
Long Beach, CA
March 20, 2009

Inside This Issue You Will Discover…

*** Bring It On
*** Heaving Insults
*** The Mother of All Bubbles
*** And More

Bring It On

What took so long? 

Really.  We expected this market rally would come two months ago.  But, finally, after touching down at 6,547 on March 9th, as of yesterday – even with the 85-point selloff – the DOW has rallied 13-percent.  It’s about time.

We’re ready, we’re able, and we’re willing for some market cheer: Bring it on!

For there’s nothing like a booming bear market rally to soften the collective brains and warm the hearts of a populace eager for some financial optimism.  Just remember the stock market’s a confounding animal.  In fact, it’s quite bewildering. 

Sometimes stocks go up and then they go down.  So, too, sometimes they go down and then they go up.  Yet sometimes times they go down and then they go down some more.  For what’s absolutely the right time to buy at one time is spectacularly wrong at another.  And what’s spectacularly the wrong time to buy at one time is absolutely right at another.

~~~~~~On the Financial Crisis Video~~~~~~

FREE 30-minute video that might just change the way you think about government’s response to the unfolding financial crisis.  If you believe the government might be trying to do too much, but you’re concerned that doing nothing at all is also a flawed approach, you should watch this insightful video right away.  Access it here: On the Financial Crisis Video.

~~~~~~~~~~~~~~~~~~~~~~~~~

From September 3, 1929 to November 13, 1929, the DOW lost 47.9 percent.  Then, as rarely noted, it rallied 48.1 percent through April 17, 1930…bringing good money, good optimism, and good people back to the market.  But alas, it was the bear trap of all bear traps…the market subsequently crashed 89.2-percent from its initial peak along with the hopes, dreams, and aspirations of a generation.

Over the last two weeks the DOW has rallied 13-percent.  Could this be the start of the next big bull market run?  Or is it a good old fashioned bear trap…a suckers rally?

We consider it the latter.  Enjoy it while it last.  If you – like most people – lost money in the stock market crash we hope you make at least half of it back…if not more.  Then, as the saying goes, ‘sell in May and go away.’

That’s our suggestion, anyway.

Heaving Insults

If you’re ignorant of the monetary policy system of quantitative easing, we apologize…for we must forever end your bliss.  The ‘quantitative’ part applies to the money supply.  And the ‘easing’ part indicates increasing.  In essence, it’s a convoluted way for central banks to increase the money supply by effectively printing new money.

This Wednesday, as reported by Reuters, the Federal Reserve “…said it would buy up to $300 billion of longer-dated Treasuries over the next six months and buy another $850 billion of mortgage securities.”

The goal of course is to keep lending rates low, to encourage mortgage refinancing, and debt based economic growth.  Will it work?  Probably not.  It didn’t work for Japan when their credit binge went to bust in the late 1980’s.  After peaking over 38,916 on December 29, 1989, Japan’s NIKKEI 225 Index closed yesterday at 7,956…that’s about an 80-percent loss after nearly 20-years. 

What’s more, whether it works or not, the fraudulence and dishonesty that’s inherent to quantitative easing makes it untenable, in our opinion.  For where is the Federal Reserve going to get the $300 billion to buy Treasuries?  They’re going to note an IOU in a ledger somewhere and – out of thin air – they’ll have $300 billion to loan to the government.

We imagine you had to work for the last dollar you received…by labor or skillful acumen you somehow turned a buck.  In other words, you earned it.  When a government issues debt and colludes with a central bank to buy the debt with fraudulent money, it heaves insults all over the idea of an honest days pay for an honest days work.

But heck, if you can refi your home loan for under 5-percent…go for it.

The Mother of All Bubbles

Just mention of the coming round of quantitative easing was enough to send yields of 10-year Treasury Notes below 2.5-percent.

As reported in this letter several weeks ago (Nowhere Left to Hide), inside the annual letter to shareholders of Berkshire Hathaway released last Thursday [February 26th], Chairman of the Board, Warren Buffet had the following remark: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s.  But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”

We believe this will go down as the mother of all bubbles.  And the coming experimentation with quantitative easing will be regarded as one of the last – if not the last – huffs and puffs of gas blown by a government desperate to support a financial system that has already crippled its economy.

You’ll know the mother of all bubbles has popped when interest rates skyrocket along with inflation and bankruptcies. 

After that the government will really make a mess of things.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  In December 2008, our friend the famed financial analyst Robert Prechter, Jr., spoke before his state legislature.  The House and Senate Economic Committee had invited him to give his unique outlook on real estate, financial markets and the economy and to share with them his ideas for what – if anything – a governing body should and shouldn’t do to make its state a more attractive place in which to live.  Prechter’s insights are anything but conventional; in truth, some could be considered downright radical.  But, as Prechter says in the presentation you’re about to watch: Today’s environment is anything but typical. An atypical problem calls for atypical solutions.  If you believe the government might be trying to do too much, but you’re concerned that doing nothing at all is also a flawed approach, you should watch this insightful video right away.  Access it here: On the Financial Crisis Video.

 

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