CREATING NEW MINI-BUBBLES
By Bert Dohmen, editor of the award-winning WELLINGTON LETTER
The biggest credit bubble in the history of the world started it’s implosion in 2007. It took four years to inflate and 18 months to deflate to a global financial crisis. But the long term effects of the implosion will be with us for many years.
As is normal, the politicians around the world are trying to reflate the bubbles, thinking they can create new prosperity that way. Austrian economists Friederich von Hayek and Ludwig von Mises wrote decades ago why such efforts always fail. In fact, they worsen the situation as they pile even more debt on the debt which produced the crisis.
The stock market rallies around the world since early March have produced the perception that economies will recover nicely, that stocks and commodities are still cheap, and that all is well. That is pure fiction. There is no recovery and stocks are very expensive.
Actually, my studies show that there is such a bounce after a crisis, but it’s a temporary affair. For investors who use that bounce for bargain hunting, it’s the killer trap. When the inevitable crisis resumes, prices plunge and all these formerly “smart” investors lose their shirts, their jobs, and maybe their homes.
The current rally has been liquidity driven. Trillions of dollars of credit and guarantees have been injected by the major central banks. But it’s not making its way into economic activity. And it won’t. Therefore, it is used for speculation.
Mini-bubbles are being produced in various markets. We saw similar market bubbles from late 2006 into mid-2007. At the time the signs of an immense credit bubble were everywhere, and it was obvious that it would eventually implode. We warned our subscribers and showed them how to profit during the crisis. In October 2007 we caught the top within two days. At that time, I was already writing my book, PRELUDE TO MELTDOWN, which predicted the 2008 crisis.
When such bubbles are created by bad central banks policies it’s difficult to sort out the true economic fundamentals from the illusion of strength caused by speculation. The strength often lasts much longer than good analysis would expect. We caught the 2007 top with technical analysis, although the fundamental warning flags were already flying early in the year.
In the markets, there is always a battle between the bulls and the bears. The bulls buy because they think the stocks or market will rise, and the bears sell for the opposite reason. Everyone gets their turn to be right…and wrong.
Technical indicators show that over the past two months the stock market rally has been weakening, that there has been significant selling, and that the up move has occurred on declining volume, involving a declining number of stocks. Those are caution signals. The major indices are still rising while the majority of stocks made their tops in mid-October. That’s how important rally top are formed. It’s a process.
CEOs of large companies are not as bullish as Wall Street. They all basically say the same thing: “we see signs of stabilization.” Well, the stock market seems to be expecting a business boom, not just stabilization. The easy part for companies has been done, namely cost cutting. What will they do next year to produce profits when costs skyrocket because of higher taxes and fees on everything?
www.BertDohmen.com
