Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Investors Don't Get Trapped in the Next Asset Bubble

InvestorEducation / Learning to Invest Jun 24, 2009 - 02:12 AM GMT

By: LewRockwell


Diamond Rated - Best Financial Markets Analysis ArticleGary North writes: I have identified the next bubble. It has already begun. It is in full swing.

Investors want to identify the next big bubble. Some investors want to buy in now, maybe using borrowed money (margin loans) to make a killing. They are confident that they will sell out near the top. They won't. Other investors just want to avoid getting trapped. They prefer to let the first group bear the uncertainty of profiting from a bubble sector.

The trouble with investment bubbles is that nobody seems to recognize them when they are making investors rich. Alan Greenspan denied that it is possible for central bankers to identify a bubble. He gave a speech in 2002, before his easy money policies had created the final stage of the worldwide housing bubble. He insisted on the following:

We at the Federal Reserve considered a number of issues related to asset bubbles – that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact – that is, when its bursting confirmed its existence.

Moreover, it was far from obvious that bubbles, even if identified early, could be preempted short of the central bank inducing a substantial contraction in economic activity – the very outcome we would be seeking to avoid.

First, he was blind to what the FED's policies had done in the second half of the 1990's to create the dot-com bubble. Second, he was equally blind to what these same expansionist policies were doing to the housing market – policies adopted in mid-2000, in response to the bursting of the dot-com bubble.

He was incorrect. Some of us did see that the dot-com bubble was a bubble. I told my subscribers in February and March of 2000 that the NASDAQ was a bubble at a price-earnings ratio of 206. The NASDAQ burst the week my second warning arrived in the mail.

With respect to the housing bubble, in late 2005, I wrote an article on "Surreal Estate on the San Andreas Fault," which warned against the coming bursting of the real estate bubble. It was clear to me what Greenspan had done to the economy.

If you remember the S&L crisis of the mid-1980s, you have some indication of what is coming. The S&L crisis in Texas put a squeeze on the economy in Texas. Banks got nasty. They stopped making new loans. Yet the S&Ls were legally not banks. They were a second capital market. Today, the banks have become S&Ls. They have tied their loan portfolios to the housing market.

I think a squeeze is coming that will affect the entire banking system. The madness of bankers has become unprecedented. They have forgotten about loan diversification. They have been caught up in Greenspan's counter-cyclical policy of lowering the federal funds rate. Now this policy is being reversed. Rates are climbing. This will contract the loan market. Banks will wind up sitting on top of bad loans of all kinds because the American economy is now housing-sale driven.

You may think that you are shielded. But your banker is not shielded. You may not deal with bankers. But your employer does.

If I saw it coming, why didn't Greenspan? Why didn't the pundits on CNBC? Why didn't the entire investment community? The real estate market still boomed through the first half of 2006. Then it began to falter. We all know what happened next.

It is not that no one can perceive a bubble while it is in progress. The problem is that investors who do not understand Ludwig von Mises' theory of the business cycle can't. They don't believe that central bank inflation causes the bubbles, and that these bubbles burst when the banks reverse their policies of monetary inflation. So, they and the advisors who cheer them on desperately want to believe the assurances by government officials and Federal Reserve Chairmen that no bubble is in progress, that there will be no regression to the mean.

The best way to identify a bubble is to look for investors who are rushing into an asset market and driving prices up to ludicrous ratios.

You can get 4.5% on a 30-year Treasury bond today. You pay $100 to get a guaranteed $4.50 a year in return: real money in your bank account (before income taxes). Meanwhile, the P/E ratio of the Standard & Poor's 500 index is at 120, if as-reported earnings are used instead of expected earnings. See the chart here.

At a P/E of 120, you pay $120 to get a hoped-for dollar of earnings (profits) for the latest reporting period. These profits are not dividends, just corporate profits.

This is a replay of 1999.


Two words: "consumer confidence."

We are told that consumer confidence has bounced back from its February 2009 low. It moved from 22 in February to 55 in May. This was a big jump. A spokesperson for the Conference Board, one of the main sources for this monthly survey, put it this way:

After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4). Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first. Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us.

Consumers listen to news reports. News reports speak of green shoots, parroting Ben Bernanke's pet phrase. That phrase has been picked up by the media, the same way that Greenspan's "irrational exuberance" was picked up when Greenspan used it in late 1996. Note: We should not ignore the context of Greenspan's remarks. It applies quite well to Bernanke's green shoots. Greenspan said this:

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

Balance sheets are crucial, he said. The #1 balance sheet in the American economy is the Federal Reserve's. It has doubled since last September. The Federal Reserve's economists did not see in August 2008 what a few weeks later Bernanke and Treasury Secretary Paulson described to senior members of Congress as a looming collapse of America's financial markets. They ignored the fact that the world's capital markets had seized up a year earlier, in August 2007. They did not see that a recession had begun in December 2007. They were caught flat-footed.

Today, Bernanke faces what Greenspan called "the complexity of the interactions of asset markets and the economy." His two-part policy has been to double the monetary base and to swap liquid Treasury debt for toxic assets held by the banks. He has allowed the banks to keep these borrowed assets on the banks' books at face value, as if they belonged to the banks. He has not challenged the Financial Accounting Standards Board reversal of its mark-to-market rule (FAS 157) in the week it would have gone into effect: April 1, 2009.

Consumers have not understood this FED-sanctioned policy of keeping bad assets on the books at Treasury debt prices. Bernanke has said that banks must be more transparent. Meanwhile, the FED has covered the entire banking industry with a security blanket that keeps economic reality from intruding.

Consumers are therefore confident. For now.


California's unemployment rate in May hit 11.5%. The state will go technically bankrupt on July 1. It is about to have its bonds downgraded to junk status. There are no green shoots in California. There is the equivalent of dead brush in forest fire season. No one seems to care.

The World Bank estimates that the world economy will sink by 2.9% in 2009. How scientific! Not 3% – exactly 2.9%. This, from an outfit that predicted with equal scientific rigor in March that the world economy would fall by 1.7%. Last November, it predicted that the world economy would grow by .9% – not 1%.

Regular gasoline is selling for about $2.70 around the country, up from $1.95 in February. The cost of getting from here to there is rising rapidly.

Yet the consumer says he is confident. "No problem!"

The summer will bring more news about rising unemployment. There will be more foreclosures. The real estate market will continue to decline. By how much? No one knows.

But aren't there statistics on foreclosures? Yes, but nobody knows if they are accurate. The U.S. government relies on a private firm, RealtyTrac, for its information. States use different ways to assess foreclosures. In April, the number of foreclosures reported for Atlanta by the national press was half of what the published local legal notices said.

The Case-Shiller index of 20 cities will show that housing prices are still falling. Commercial real estate prices will fall as vacancies rise. There will be more closed banks. The FDIC's assets will go below $12 billion. Then $11 billion. Then . . . ?

All of this is obvious. The public ignores it. This is why consumer confidence is a bubble. It keeps rising, yet it is not supported by the facts that count, which are data on the state of the real estate industry in relation to the solvency of the banks.

Doug French is a former banker. It was his warning at a conference in November 2005 that persuaded me that the real estate market and the banks were jointly entwined and headed for a disaster. His recent article, "Dead Banks Walking," appeared on June 16. His assessment indicates that we are nowhere near the bottom for either real estate or the banking crisis.

Bankers, pressured to earn returns for shareholders and protected from bank runs by FDIC insurance, have over time lent not only more of their deposits but advanced the money for riskier projects. James Grant in a recent Grant's Interest Rate Observer reminisced about National City Bank, which back in 1954 had only lent out 41 percent of its deposits, with less than one percent of the portfolio being real-estate loans.

By the end of last year, the total loan-to-deposit ratio for all US banks and thrifts was 87 percent, and 60 percent of all loans were classified as real-estate secured.

The public has never heard of the loan-to-deposit ratio. That does not change the fact that the ratio is historically high, and way too much of it is tied up in real estate.

I keep thinking on Mr. T's threat, 27 years ago: "You're going down!" The question is this: Is Ben Bernanke Apollo Creed or Rocky Balboa?


Optimism is as optimism does.

The American consumer may be less pessimistic today than in March, but he has less money to spend. His outlook has not been confirmed by the labor market. Unemployment is rising.

Then which market will confirm his optimism? Housing? No. Auto sales? In the second half of the worst year in decades? People are going to rush out to buy a new car, when the new models are due in October? We'll see in October. But the industry needs sales now.

Where will the hoped-for deliverance come from? Not from private industry. Private industry must compete for capital with the Federal government. Lenders must supply the Treasury with about $85 billion in loans each week to roll over the existing debt and pay for this year's deficit. From China? China is spending money on commodities and domestic bailouts. From Japan? With trade down, its surplus is down. From Europe? It is in recession. Then where?

There is no economic recovery yet. There is only a reduction in the decline of the economy. Earnings are still falling. Mortgage rates have risen. There is no end in sight for the real estate contraction. The banks will be squeezed. State budgets are running large deficits. They do not have money to offer more unemployment benefits. They are facing over $120 billion in red ink in the fiscal year beginning on July 1.

Tax revenues are down. Expenditures are up. Debt is rising. Interest rates will follow. State and local bonds will be downgraded.

So, consumer confidence is a bubble market. Stay out of it.

    Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

    © 2009 Copyright Gary North - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules