Cascading Bubbles

For reasons unknown, I've never really liked the term "bubble", but due to a lack of a better term, I'll use it today to illustrate a point.  I've always liked the phrase "overshoot and collapse" which is used in the biological realm to explain the rapid growth and subsequent crash in the population of a given species.  That's a subject for a later post.

I thought it would be interesting to analyze the impact of the money supply through time on various "bubbles".  The chart below illustrates quite beautifully how the money supply (M3-black dash) impacts the rise and fall of all markets.  The chart compares 5 asset types: technology, financials, oil, homebuilding, and wheat.  These all have experienced drastic "rise and falls" since the mid to late 90's.  Many commodities followed the exact pattern, but I used oil and wheat as two examples.  Click on the chart for a larger view.

Observations that can be made:

1. 
   
   M3 (money supply) rises in the early 80's (Reagan), flattens in late 80's (Bush I), rapidly accelerates in 1995 (Clinton), and keeps rising rapidly after 2000 (Bush II).
2. 
   
   Reagan pulls us out of the doldrums not by magical things called "trickle down" or "supply side", but by turning on the "money supply accelerator" in the early 80's.  Note the M3 Rate of Change curve on the bottom.  A trending up curve indicates a rapidly increasing money supplly while the downtrend is decelerating.
3. 
   
   The Great Maestro, Alan Greenspan, pulls off the accelerator in 1988 and Bush I loses re-election.
4. 
   
   Note that during the "flat" M3 from 1988-1995, the markets are aligned and flat. 
5. 
   
   In 1995, Clinton leads the public to believe that he magically makes the deficit disappear and balances the budget.  Meanwhile, the money supply starts a significant upward climb.  Note the M3 Rate of Change on the bottom of the graph.  It rises rapidly.
6. 
   
   Subsequent with the rapid rise in M3 in 1995, the markets go into "chaos" mode.  The money supply drives the financials and technology through the roof.  Note the steepness of the curves after 1995 in all sectors.  The end result is the DotCom mania.  Now we understand where all of that crazy investment and venture capital money came from!
7. 
   
   DotCom crashes only to see the "credit bubble" move into financials, homebuilding, and commodities (oil/wheat).  2001 marks a "new beginning".  Same game, but different sectors.
8. 
   
   The markets all align in late 2008 subsequent with the steepest rise in M3 Rate of Change.  Then they ALL come crashing down.  As Robert Prechter with Elliott Wave International has stated, "all the same".  Equities and commodities crash together in perfect synchrony.
9. 
   
   Money supply has significant impact on the markets.  While the Federal Reserve was supposedly created to help "nudge" the market when it needed assistance, the contrary is presented from this 30 year history.  After 1995, it looks more like a heroin junky flying up and down.

The Emerging Shift

More from the interview with Long Wave master, David Knox Barker:


"Human psychology drives the cycles and there are trends in psychology. For instance, if you look at the 1970s to early ‘80s and the force that brought Ronald Reagan into office, it was a seasonal change in the long wave. It was a shift from the Roosevelt era of the 1930s of “The government should go out and save me from the economic forces” to “Let the free market take care of itself.” Then with Obama we saw a shift back to the idea that the government needs to step in and control the markets. A lot of the psychology you see is manifested in political trends. In the 1930s we gave the New Deal a chance. I talked in about that in the 1995 edition of my book, that fact that we’d probably see a global version of the New Deal proposed during the present crisis. And sure enough that’s exactly what was proposed [during the credit crisis of 2008]. The fact that people are even talking about a global New Deal is a sign that the psychology has radically changed. The socialists are excited because they think we’re headed in that direction, but I think they’re in for a major disappointment. I think we’re heading for a shift [in psychology] to a degree larger than the previous shift in political psychology. I sincerely believe the Tea Party movement is an early manifestation of this emerging shift, which I believe will be toward the Great Republic."

Read the entire interview:
http://financialsense.com/editorials/droke/2010/0415.html

Noonan On The State of Affairs

Peggy Noonan, author of seven books and a former President Reagan speech writer, writes in her latest book, "Patriotic Grace":

"What are we barreling toward? A difficult time, I think. We know we live in an age of weapons of broad and immediate destruction, that they can be deployed against civilian populations by any group with the will, money, and mad focus to do it. I think a lot of people are carrying around in their heads, unarticulated and even, in some cases, unnoticed, a sense that the wheels may be coming off the trolley and the trolley off the tracks, that in some deep and fundamental way things have broken down and can’t be fixed anytime soon. It came to me as a reordering thought. I’d felt a version of this sentiment since 9/11, and maybe you did too. The old ways are over, the old politics are over. We have to sober up, we have to change. This is a time for seriousness, for high-mindedness, forbearance, and reason. Is there a grown-up in the house? America is at a very crucial stage in its life. That we're facing some really big things and we're acting like it's still the 1980's and still the 1990's and still having our brute, dumb, vicious politics at a time that we need something better. Before this is over, we'll all have to help each other down the stairs. Something tells me that it's going to get a little dark out there."

"Patriotic Grace" on Amazon along with an interview about the book:
http://www.amazon.com/Patriotic-Grace-What-Why-Need/dp/0061735825/ref=sr_1_1?ie=UTF8&s=books&qid=1245073984&sr=8-1

Crack & Credit

Through my involvement with Emmaus-Harlem the past few years, I've had the opportunity to spend time with several recovering crack addicts. My friend, D, shared his experience in the 80's with me when crack was at its peak. D said that the key factor with it's proliferation was price. He said that a hit of crack could be bought on any corner of Harlem for $10. He lived on the streets for over ten years and used his panhandling earnings on crack. While cheap, the high didn't last long, so it was a constant "rat on a wheel" trying to stay high.

We continue to witness the current worldwide unraveling of the credit markets. I often think of D's crack story and see a great correlation between the crack business and the credit markets. D said that he could find crack on every corner. We have 7 banks on the intersection near my house. Commercials on TV at night still advertise easy credit deals. Every time I'm in my bank, they're offering something to me. The crack dealer serves the crack addict. The Federal Reserve fuels the "bank dealers" that serve us, the "credit addicts". Like crack, for some reason our material items acquired on credit only provide us with temporary satisfaction. Once the high is gone, we search for the next hit.

The dealer and the addict have a symbiotic relationship. Without the crack addict, the dealer would be out of business. Both are doing something destructive and both must be held responsible and accountable. When it comes to our current crisis, we want someone to blame. We want the "credit dealer" to be blamed. Those with underwater mortgages want to blame the lender. I enjoyed my 0% car finance deal back in 2002, my mortgage refinance in 2003, and my home equity line of credit. While I haven't used the line of credit, the bank was glad to provide me the opportunity to drain the principal out of my house. Of course, they couldn't make me do that. I'm ultimately responsible for my actions and must take responsibility and accountability for them.

On a larger scale, our country has been high on "debt crack" since the Reagan administration. We have amassed a $56.4 TRILLION "crack obligation". We've recently taken an additional $2 trillion crack hit with an addiction problem that now seems more out of control than ever. It might be time for individuals, corporations, and countries to head to rehab. This addiction is unsustainable.

Back to the original story. Today, D serves as the onsite coordinator at Emmaus. He's a great success story. Once homeless, now he serves the homeless. His street experience and passion for the homeless ministry keeps Emmaus alive and active. To make a donation to the cause...

http://www.emmaushouse-harlem.org/

Father David Kirk On Fear

Being Holy Week, I'll take a breather from the crazy events in the world and present some writings from Father David Kirk.

DO NOT BE AFRAID

"We live in difficult days. Reagan, Gorbachev. We're told to fear travel. To fear to walk anywhwer. To fear muggers and looters, autos and storms. To fear the Russians, the Communists, the Nicaraguans."

"Fear is a lifestyle; In New York City, we're like a knot of animals, threatened, surrounded. And it its said" only those who fear mightily and react violently will survive. Ethics of the shotgun. To give up all our fears is to give up our humanity. They say: fear guarantees survival. Put before us is the enemy. Bob Dylan: 'Making us think we have something to defeat.' "

"But to all this, through all this the Gospel maintains: 'There is no need to be afraid, my little community, for your Father is to give you the Kingdom.' A promis, nothing more, is the only thing we seem to have. Nothing else. Is that sufficient to help us survive, for us to hang on to, to make us motivated enough to continue?"

"For Abraham, it was. Because of such a promise Abraham left his home and went out and lived in a tent, looking for a city built by God. He never saw that city, he never arrived at it, his whole life was full of complications; even when he had a son, he was asked to sacrifice him to God. But he kept on because of his dream, because of that promise, because of that town, because of something he never fully saw realized in his life."

"Fear clogs. 'To he who is afraid everything rustles.' St. Maximos"

"Faith liberates. Cruelty and fear always walk together."

Father David Kirk (written in the 80's)

For more on Father David Kirk:

http://www.fatherdavidkirk.com/

http://en.wikipedia.org/wiki/Father_David_Kirk

http://emmaushouse-harlem.org/

Not Weel

Way back when in the college days, I was out on the town one night with my buddies in my hometown of New Orleans. It was late in the evening and we were exiting Pat O'Briens and as we were turning left and approaching Bourbon Street we came upon the famous fast food eatery, Takee Outee. Takee Outee was a tiny little Chinese takeout that was quite questionable in it's cleanliness, but at 2 a.m. the egg rolls were to die for. That evening I was needing a late night snack so I walked up to the counter and ordered one eggroll. The Chinese man behind the counter quickly said "no eggwoll". I said, "one eggroll". He again said "no eggwoll". I said "no I just want one eggroll". He emphatically said "no eggwoll". I pointed in the glass covered area at the last eggroll and said "I just want THAT eggroll!". He reached in the case and lifted the plastic eggroll up in my face and yelled "not weel". Reality quickly set in and I realized that I had been arguing with the man for two minutes trying to purchase a plastic eggroll. I concluded it was time to head to the house!

When I look at our current financial markets and our "super size me" lifestyle, I often think of the Chinese man at Takee Outee and think "not weel". For twenty six years, we've inflated the system with massive amounts of credit. All presidents since Reagan participated in the process. Are our big cars, big houses, big vacations, and big appetites real? The savings rate for the average American is below 0%. Now that eggroll is real. Our debt is real. When we fully grasp the reality of the situation and come to grips with our past credit-driven lifestyle, I wonder what our gameplan and mindset will be. It's time to pass on the eggroll and head to the house. How will we handle that long ride home??

Sleep Easy, Those in Charge Know What They're Doing

"No one knows what to do. We are in new territory here. This is a different game. We're not here playing soccer, basketball or football, this is a new game and we're going to have to figure out how to do it." Senate Majority Leader Harry Reid
What?????

“This action does entail risk.” George W. Bush
I feel better now

Jan-2008: Democratic Rep. Marcy Kaptur of Ohio launched into a lengthy question to Ben Bernanke during the Fed chairman’s House testimony about community banks, securitization of home loans and investment banks’ role in the crisis, ending with this point: “Seeing as how you were the former CEO Of Goldman Sachs…”She was quickly stopped by Mr. Bernanke and the laughter in the room. “I’ve got the wrong firm?” she asked, before being corrected that she was thinking of Treasury Secretary Henry Paulson. “Oh, OK. Where were you, sir?” Said Mr. Bernanke: “I was the CEO of the Princeton Economics Department.”
She’s one that will be casting another vote on Thursday.

“Economics is something I don’t really understand.” John McCain
Yikes!!!!

“This all started with the subprime mortgage crisis.” Barack Obama
Wrong!

It started in 1982 with Reagan/Voelker and the Fed’s credit machine. This is a 26 year issue, not a 2 year issue. The system and problem is much greater than the mortgage market.

The Rising Tide

The rise in credit drove the rise in the financial markets, home sizes, debt levels, confidence, waistlines, car sizes, and childhood obesity. It’s all intertwined and some might say it was all artificially created. The “supersize me” era has ended. History will show that 2000 was the beginning of the end of this massive credit orgy. While everyone is blaming the mortgage market, I believe that this situation or cycle dates back to 1982 with Reagan/Voelker. That’s when the credit and greenback printing presses started warming up. Bush Sr./Greenspan participated. Clinton/Greenspan accelerated to a higher level and Dubyah/Bernanke continued the process. ALL were participants. Both political parties. To hear Greenspan interviewed last week and state that he knew this was coming is outrageous. He was the mastermind behind the majority of the credit cycle. The Fed continues to destroy the U.S. dollar. At some point, the printing presses will run out. Two years ago the Fed quit reporting M3 figures. They said that it was too expensive to track!!! Zimbabwe did the same thing with their inflation rate. Don’t worry, we got ya covered!

Puplava's Prediction at The Inflection Point

from financialsense.com
We are now at an historic inflection point in history—with no turning back the clocks. Had our political leaders from Reagan and Clinton to Bush I and II been more fiscally responsible, we wouldn’t be facing the largest monetary storm in history. That monetary storm lies directly in front of us. Bernanke and Greenspan may summarily dismiss high oil prices, but for most of us who live in the real world, higher energy costs are going to be inflationary. Investors need to start preparing for $100 oil. Higher oil prices will eventually permeate all aspects of economic life, driving the costs of basic necessities higher. In the future you may be able to buy a flat screen TV, DVD player or personal computer at a cheaper price, but the cost of everything else will be rising. The things that you need in everyday life will all be going up: your grocery bill, your utilities, the gasoline that powers your car, visits to your doctor or dentists, tuition, and lastly, taxes.

The economy will vacillate between periods of deflation and inflation, with each recession bringing forth a temporary reprieve from what will be an inexorable rise in the general rate of inflation. Eventually wars, deficit spending, a rising mountain of debt, and peak oil will lead towards hyperinflation in the United States.

Already, the U.S. is exhibiting many of the pre-hyperinflationary conditions that are so prevalent in many South American and Eurasian economies. Evidence points to several factors that will lead us there:
Large budget deficits
Deteriorating international trade balances
An eroding international currency
Eroding financial confidence
Growing protectionism
An expanding war on terrorism and the need for security
Growing entitlements

Whether the U.S. experiences hyperinflation or simply higher inflation rates will be dependent on the political will of its leaders to rein in spending and bring its fiscal imbalances into order. At this point, it appears hopeless with over $51 trillion in unfunded Social Security, Medicare, and pension liabilities now growing at over $2 trillion a year. History teaches us that debt imbalances of this magnitude are always inflated away.

An expanding money supply, abundant credit, and negative interest rates are inherently inflationary. When investors realize that they can borrow money at next to nothing rates and invest that money in hard assets and get an immediate return, the demand for such assets rises. This leads to higher prices, asset bubbles or inflation. This is what is going on now in the financial markets, the real estate market, and in the commodity markets. A flood of money and credit throughout the world is driving asset bubbles and inflation. Central banks can create money and credit, but they are unable to direct where that money flows. One of the chief characteristics of inflationary cycles is asset bubbles. First, it was stocks in the 1990s. Then, it was real estate and mortgages in this new century. It is now working its way through to the commodity markets. The new bull market in commodities will dominate the financial markets the balance of this decade and the next.

As debt levels rise in the U.S. at unprecedented levels, the Fed will increasingly become impotent. Unlike Volcker in 1979, today’s U.S. economy is far more debt laden. Because of this huge debt overhang and the huge asset bubbles that support it, the Fed’s options are limited. The Fed simply can’t afford to raise rates in the same decisive and single-minded way that Volcker did during 1979-1982. The Fed’s new mantra is "measured." This means that real interest rates will remain negative for a long period of time.

No matter how high inflation finally gets, it is abundantly clear that the financial markets are undergoing a paradigm shift from a bull market in paper to a bull market in commodities or "things" as I like to call them. Investors will need to focus on a different class of assets. Real assets are going to be the big winners in this new emerging bull market. Commodities are becoming "The Next Big Thing." Precious metals, base metals, energy, water, and food are where the next fortunes are going to be made. Precious metals have, will, and are going to lead this new bull market. It is in regard to precious metals that I devote the remainder of this essay.