More Bubble Trouble?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

First
things first. Yesterday was the eight anniversary of September 11th,
2001. I want to extend my deepest sympathies to those who lost loved
ones on that awful day.

A lot has happened in the markets in the
last eight years, but one thing remains constant, greed and fear. In my
last post looking at whether the recovery will mirror the decline,
I concluded that all the liquidity in the system will ensure another
bubble and we all know that asset bubbles do not end well.

But what are the bubbles in the making? Lawrence Delevingne reporting for the Business Insider blog recently wrote on Ten Bubbles in the Making:

One
year after America's brush with economic catastrophe, there's plenty of
looking back at the bubbles that caused financial chaos.

But what's next?

There are surely dangerous economic bubbles forming as we speak. As Alan Greenspan warned this week,
"They [financial crises] are all different, but they have one
fundamental source," he said. "That is the unquenchable capability of
human beings when confronted with long periods of prosperity to presume
that it will continue."

The trick, of course, is spotting them. By definition, most people don't spot a bubble before they form and burst.

Here's 10 for which you should be on alert:

1. China bubble:
Despite the weak global economy, the Chinese stock market has soared
like crazy this year. But many believe the rally has been driven purely
by government-supplied liquidity, rather than fundamentals. The fear is
that companies are flush with cash, but have little "real" to do with
the cash, so they're parking it in the stock market casino. The Chinese
real estate market appears to be on a similar trajectory.

2. Green bubble:
Green has been everywhere. With observers saying the "Age of Cleantech
and Biotech" will be the next major economic revolution, and Washington
pouring billions of dollars into alternative energy projects, you'd
think a bubble would have already formed. But, as we noted this spring,
it did not, at least from an investment perspective.

Still,
as the economic recovery takes shape, alternative energy could see
excess investment on hopes of big future returns. There's plenty of
hype left, and if investors regain the cash to get in the game, could green become the next internet or housing bubble?

3. Gold bubble: Gold prices just keep going up. They've risen for seven straight years, recently breaking $1,000 per ounce.

Is
it a bubble? Right now, it doesn't look too bad. Gold is good in both
inflationary and deflationary periods, as it holds wealth tangibly.
And, as the Telegraph notes, there's real demand, especially from China.

But
with some predicting a doubling of prices to $2,000 an ounce, too many
people could jump in and spike the real value of the precious metal.
The "rise forever" mentality usually means trouble.

4. Federal Reserve bubble: Is the Fed saving the financial system or creating another dangerous credit bubble by snapping up mortgage-backed securities?

At first glance, the Fed's effort to clean up mortgage-backed securities is a winner. But, as Heidi Moore wrote for Slate's The Big Money,
the Fed is actually creating a bubble similar to the one it's trying to
do damage control on. By eagerly trying to save banks and stabilize the
housing market, Washington is taking on too much: $1.25 trillion
of mortgaged-backed securities, including both the original toxic
assets and products of foreclosures to come. So who would bail the Fed
out? You.

5. Trash stock bubble: There's a rush to trash going on. Stocks like Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even GM made big runs in August -- trading in trash financials made up nearly one-third of NYSE's August volume.

So
why are people buying junk? Charlie Gasparino says shares of junk
financials -- companies like Fannie, Freddie, AIG, Citi and Bank of
America -- are being pushed up by a short squeeze. The Wall Street Journal suspects
its high frequency traders. And others say its retail speculation and
day traders getting their way while Wall Street went on vacation.

6. Education bubble:
More people are going back to college and taking on huge debt to do it,
despite questions about what the degree is really worth.

Last
year, the amount borrowed by students and received by schools grew some
25% over the previous year, to $75.1 billion. That's a huge amount,
especially with weak, low-paying job prospects for graduates in this
economy.

As we've noted,
all this student loan debt is crazy. Despite the desire to see more
subsidization of college, we suspect there will be a collapse in
student loan debt availability and desire to take on new debt.

Short of telling kids not to go to college, something's going to give.

The pop may be starting already. As Bloomberg reports, as many as one-third of all private colleges surveyed
said they expected enrollment to drop in the next academic year. And
almost 40 percent of those colleges said some of their students dropped
out due to personal economic reasons and a quarter said full-time
attendees switched to part time. Half said families had to cut back
their expected contributions as the value of college savings plans
dropped 21 percent last year.

7. Subprime bubble, 2.0:
What are banks doing with all those subprime mortgages? They're
repackaging with a higher rating -- "re-securitization of real estate
mortgage investment conduits" -- and selling them.

As we've noted,
it's a plan nearly identical to the complicated investment packages of
the financial crisis a year ago. That being said, the problem was not
strictly securitization, but the underlying housing bubble. So the
return of complicated products isn't necessarily the end of the world.

8. Life insurance securitization bubble:
In its search for new profits, Wall Street is planning on securitizing
“life settlements" -- policies that the sick and elderly can sell for
cash while they're alive -- much like it did subprime mortgages. The New York Times warns that we could be looking at subprime all over again.

Maybe. As we've noted,
it wasn't securitization that caused the financial meltdown. It was the
bursting of the housing bubble. Yes, there was a feedback loop, whereby
securitization allowed more money to flow towards housing, but it seems
unlikely that "life settlements" would get big enough to infect all
portions of the financial world.

9. Commercial real estate bubble: This bubble is already hissing, if not popping outright.

While
the economy is improving and some home sales are slowly coming back,
the commercial real estate market could get far worse.

As The New York Times reports,
"Even though industry lobbyists were able to persuade Congress to
extend a loan program aimed at prodding the stalled securitization
market back to life, several analysts said it was unlikely to head off
a spate of defaults, foreclosures and bankruptcies that could surpass
the devastating real estate crash of the early 1990s."

As UPI notes,
commercial mortgage defaults could reach 4.1 percent by the end of the
year, up from 2.25 percent in the first quarter, and Real Capital
Analytics estimates commercial property loans worth $83 billion have
been involved in default, foreclosure or bankruptcy in 2009.

Badly hit will likely be malls. "The
next financial tsunami to hit will be the widespread failure of
shopping center mortgages," says Peter Monroe, co-chair of REOMAC, a
not for profit trade association to CNBC.
"Half a trillion dollars of commercial loans financed on historically
low rates, are due for refinancing in the next three years," says
Monroe. "The negative impact of these shopping center mortgages is
enormous."

10. Emerging market bubble: It's not just China. Risk-tolerant investors are bidding up emerging market shares
to valuations not seen in 9 years. With an average PE of 20x, they're
not in bubble territory just yet, but watch for things to get out of
hand.

Click here to view the 10 bubbles in the make slide show.

Some
comments on these potential bubbles. Earlier this week I had my
quarterly lunch with three astute investors. One of them remarked that
he thinks gold might be the next bubble and now that Barrick Gold removed its hedges, he thinks it makes sense to buy a gold ETF like the SPDR Gold Shares (GLD).

As
for other bubbles, some concern me more than others. The commercial
real estate fiasco is driven by huge inflows of pension funds and
wealth funds recklessly bidding up prices with no regard of the
underlying value. Now after several years of nonsense, commercial real
estate risks sinking pensions. Private equity is also at a breaking point and infrastructure is destined to be the next major asset bubble that pops.

Josh Rosner, managing director of Graham Fisher, was on Tech Ticker recently saying that we're not out of the woods yet:

Everybody, it seems, knows the banks face future losses from commercial real estate, still-rising foreclosure rates, and credit card delinquencies, among other loan types.

Investors
are currently ignoring the “massive losses” ahead for the industry and
instead are focusing on the various and sundry ways the government is
helping banks recapitalize on the cheap, says Josh Rosner, managing
director of Graham Fisher.

But Rosner, who turned bullish on the sector last spring after making some very prescient warnings
in 2007, says the bank rally is likely to end by late October, when
investors start discounting what’s ahead. “We’re not out of the woods
yet,” he says.

Furthermore, Rosner says there are other risks to
the industry that aren’t being priced in currently, most notably the
FDIC’s ability (and need) to raise fees further as its insurance fund
dwindles to dangerously low levels.

The
FDIC is likely to hold off until the industry becomes healthier, Rosner
says. But "when you think you've got earnings visibility as an
investor, all of a sudden you really have to say 'hold on, what are the
assessments going to be for the insurance fund'? It has to be
significant. At some point the industry has to pay back the FDIC."

Teck Ticker had another excellent interview with Richard Bookstaber discussing whether regulators can save us from ourselves?:

Risk.
More than profit and loss, it's the guiding principal of capitalism.
The "right" amount creates a healthy financial system and "too much"
leads to failure, big and small.

That's the topic of discussion
in the accompanying clip. A year after the world realized Wall Street
had taken its dose of risk in excess, Richard Bookstaber, hedge fund
veteran and author of A Demon of Our Own Design, says there's "less risk in the system right now for the simple reason that everyone's deleveraged."

It
won't last forever. The incredible trading success Goldman Sachs has
enjoyed this year is bound to change behavior, he warns. As they reap
the profits, "other people will feel forced to follow suit and start to
take risk. That's not a good sign."

It's a problem former
Citigroup chief executive Chuck Prince so famously addressed in July
2007, when he said: "When the music stops, in terms of liquidity,
things will be complicated. But as long as the music is playing, you've
got to get up and dance. We're still dancing."

What's worse, the
risk to the taxpayer has never been greater because former investment
banks Goldman and Morgan Stanley are now bank holding companies backed
by the FDIC.

So how can we prevent the boom and bust cycles former Federal Reserve Chairman Alan Greenspan coughs up to human nature? Bookstaber says regulators "have to make sure the people taking the risk are left holding the bag rather than the taxpayer."

"It's really up to the regulator, in a sense, to save us from ourselves," he says.

One
thing he said is that Goldman Sachs is now taking risks that paid off,
but if everybody feels pressured to emulate them, then they will be
building new systemic risk all over again. That is one fundamental flaw
of the whole financial system that has yet to be addressed.

Speaking
of systemic risk, over in Europe, there are growing calls to regulate
the hedge fund industry. Bloomberg reports that that Poul Nyrup
Rasmussen, the Socialist Party president who led a two-year campaign to
introduce the first European Union regulation of the hedge fund
industry, said he will next press firms to reduce their fees.

In
an interview with the Guardian on Friday, Spain's Economy Minister,
Elena Salgado, has backed European Union plans for tougher regulations
on hedge funds stating that hedge funds are not for hedging:

At stake is London's position as the hub for 80% of Europe's
$400bn (£240bn) hedge fund industry. If the EU's proposed directive is
passed in its current form, hedge fund managers say they may leave
their Mayfair offices and flee to Switzerland, where the regulations
are less onerous.

London's mayor, Boris Johnson, has led a
campaign to protect the industry, successfully courting the Swedish,
who currently hold the European presidency, and gaining their support
for redrafting the directive. But in January, when Spain takes over the
presidency, hedge funds will be up against Salgado.

"They
need to be regulated, and our regulation [in Spain] on alternative
investment funds is strict and has been for a long time. Not only hedge
funds, but other funds as well, like property funds," she said in an
interview following the G20 meeting of finance ministers last weekend
in London.

"The directive introduces some bigger obligations, in transparency and the protection of consumers, that we think are adequate."

Spain
is backing France and Germany, which have pushed towards tougher
regulation of hedge funds, blaming them for exacerbating the credit
crunch by betting on a plunge in banking shares. Salgado, and Spain's
ruling Socialist party, also back Angela Merkel and Nicolas Sarkozy's
criticism of so-called Anglo-Saxon capitalism, advocating a more
socially sensitive model.

World leaders will again discuss the
role of financial institutions and the way their pay their staff at the
next G20 summit in Pittsburgh on 24-25 September.

"We have to
think about the social costs of our decisions," Salgado says. The
debate about bank bonuses has not come to the fore in Spain because its
financial system is smaller and there is less transparency about
bankers' pay.

In an interview with Il Sole 24
Ore on Thursday, former Federal Reserve Chairman Paul Volcker said
banks should not be allowed to own hedge funds or equity funds and their trading activity should be limited:

"A
bank that generates the major part of its income from trading should
not be allowed to have a banking license," Volcker, an economic adviser
to the Obama administration, said.

Asked about introducing caps for bankers' pay, Volcker said bankers would find a way around that.

"We're seeing it already; it's obscene what they're earning," he said.

One year after the Lehman Brothers collapse, Volcker said he feared
Wall Street would return to its old ways and "we will miss the train
for reform".

He said he did not think inflation was an immediate threat given the high unemployment and weak global economic growth.

Asked about the high U.S. deficit, Volcker said it was not a problem for the time being.

To tackle the crisis the Federal Reserve had injected an enormous amount of liquidity into the system, he said.

"For now we can absorb this but it could be a problem when the economy starts to grow again".

Volcker said the rating agencies had contributed to the breakdown of the financial system.

"A possible solution might be to de-monopolise the sector. Maybe there
should be many more of them... And they could be paid by investors," he
said.

The banking/ hedge fund/ private equity/
commercial real estate bubble is the Mother of All bubbles, but this is endemic
to a culture that promotes excessive risk taking and rewards it with
excessive compensation.

Finally, a word of caution of the "green energy bubble". Last week Naked Capitalism posted an entry stating that Solar Crisis Set to Hit in 2010. Again, avoid listening to this doom & gloom. The sun is not setting on solar stocks and top hedge funds are scooping them up at these levels. Moreover, the solar credit crunch will ease in 2010.

And
then there is the biotech and health care bubble. Biotech is extremely
interesting but very risky. In health care, I like medical device
shares and monitor a list of stocks that hedge funds are buying. You can
also invest in the iShares Dow Jones US Medical Devices (IHI).

So
place your bets on the next bubble, being fully cognizant that some
bubbles are better than others. In particular, some bubbles might
allocate much needed resources to renewable energy and health care
while others risk the demise of the entire global financial system.

Comments

[Leo Kolivakis]

McGriffen,

No question the hedge fund industry has contracted since last year. Some of the largest funds of hedge funds got whacked as investors redeemed billions. Things have stabilized in the last quarter as stock markets rallied but we shall see if this is a temporary reprieve or a bottom leading to a pick in activity.

By the way, the latest bubble to burst is the pension bubble. OUCH!

cheers,

Leo

[McGriffen]

Found my own answer...compliments of a new service from mid-April.

An industry shrinking by 41% in less than 12 months...one could say that bubble has sufficiently burst.

- Net investor redemptions and liquidations in March were an estimated $23.97 billion compared to investor outflows of $41.14 billion in February and $165.25 billion in December. - For Q1 2009, hedge fund assets fell an estimated 10.78%, or $208.36 billion. Redemptions accounted for a net $217.75 billion reduction and liquidations accounted for an estimated $12.61 billion while performance accounted for a net increase of $22.01 billion. - The hedge fund industry has contracted 41% from the asset level peak in June 2008 to the current trough.

[McGriffen]

I do not have number or reference material handily available, but haven't a good number of hedge funds and PE shops already closed, or still working with investors on the gate / redemption withdrawal issues?  I know that endowment funds, broadly speaking, have been crushed.

I think that Cerebrus was in the news recently for investor withdrawals...something nearly 70% of their base wanted out.

I'd also bet a lot of Midwest ethanol co-ops are fearing the reaper lately...oil needs to be much higher to make those bad boys pay off.

[Crab Cake]

Good article great thread. 

The greatest bubble no one talks about.... Mankind.

When all the trees have been cut down,
when all the animals have been hunted,
when all the waters are polluted,
when all the air is unsafe to breathe,
only then will you discover you cannot eat money.

Cree Prophecy

[bpj]

It's been posited that is exactly what happened on Easter Island, at least for the available trees for fuel.

[Anonymous]

I think while people buy "paper gold", physical gold will be safe. Of course physical gold is all about hoarding and not trading (very inconvenient). There is not a great deal of the yellow metal to go around. 8000 cubic metres wouldn't divide up well if everyone went after the stuff (the reason for modern fiat currency).

[Anonymous]

hello

[Anonymous]

Has anyone really analyzed the obvious here? The invention of electronic money rivals that of paper fiat money. What are the implications? Paper money has lots of ways to be diluted & manipulated & we know those ways thru long experience. My intuition tells me that electronic money has these flaws increased by an order of magnitude. What other flaws does it have that are unique to it's nature? Certainly Credit Default Swaps & the securitization mess may be examples of these unique to electronic money flaws. The greedy amongst us are actively trying to find these flaws in this new money. Call them financial hackers; Hack the system & get rich. The new supertrading programs are a hack. My greatest fear is that we now have TWO money systems to collapse; electronic & paper. Are they so interconnected that if one goes it will take the other with it? My intuition says yes; especially with the new electronic money completely unregulated & spinning out of control.

[Hephasteus]

So many frauds that are pure fail face to face are just golden in electronic media. This truely is the golden age of fraud and manipulation.

[Anonymous]

Yep. Why do you think the DTCC was so keen to eliminate paper stock certificates? Hampered fraud and manipulation.

[Anonymous]

Guys, I work for a national science lab, and let me just say that the government has done squat for energy science. Really, its just pennies, and most of it is directed towards giveaways to very conventional "alternative" energy projects (read crony capatalism with no real innovation). If the stimulus etc is going to fuel a major boom in green-tech, where are the jobs in science? There are no new jobs.

So, my conclusion is we are moving straight to the crack up boom. The Obama admin has no interest even in where the money goes, and even if they did, the people in charge of disbursement in our scientific infrastructure are to stupid and corrupt that they couldn't do a good job even if their lives depended on it. What do you think 8 years of Bush did to DOE and NSF? A heckofajobbrownie.

Let me just close by saying our week attempts at alternatives are just pathetic and inadequate to even marginally mitigate the coming energy shitstorm. Its gonna be Katrina times the whole nation for years. We are just sitting around with our collective thumbs sequestered up our jacksies. The guys in white coats are not going to have any answers and our entire scientific infrastructure has been gutted in favor of political grandstanding and over inflated research "results".

[Hephasteus]

It's self justification repeating pattern phenomenon. Like shortly before and after we discovered pluto there was alot of conciousness about repeating patterns and people layed down the silliest repeating patterns. Like japan set up an empire structure that wared to gain new materials to war to gain new materials that wared to gain new materials. Setting up of the assembly line. Automating everything.

Same thing here. If we divert to alternate energy it takes away too much justification for the in place system. Alternative energy requires a limiting mind that's focused on efficiency and real usefulness and real benefits which makes a power hungry unlimited conciousness feel very threatened. Even too much thinking about it makes government crazy.

[MinnesotaNice]

Interesting perspective... just what my gut was telling me.  My thought is that the complexity of out government systems no longer allows effective and efficient allocation of resources to drive a particular goal with effective momentum.

[Anonymous]

Energy lab guy here again.

As a follow up, note that NASA told Obama that, no we cant go back to the moon. We had the scientific capabilities in 1969 that we no longer have now. Its the same in all areas. We have a lot of scientific hype about supercomputers etc, but the reality is that those computers don't really work. They are just big media events -- we don't any software besides trivial stuff that runs on them. Its all smoke and mirrors.

[straightershooter]

Question to all ZHites,

Which bubble is the mother of all bubble?

The Fed bailout bubble?

[JohnKing]

The Greenspan bubble.

[bpj]

In 2006 I met a ex-marine in a emini chat room and he happened to live in the area and wanted me to show him how to operate certain software. He came over and we talked and it turns out he had "bought" 5 houses in south Orange County, CA. I was dumbfounded that a 23 year old "kid" could acquire so much...responsibility. Anyway received an email from him about a year ago...from Anbar province, Iraq. He had no other option but to re-up.

[JohnKing]

LOL

I was looking at a used vehicle to purchase so I asked the seller, a Brazilian in his mid-twenties why he was selling the truck, he told me that he had 3 houses in foreclosure and needed the money to get back to Brazil.

Kamikaze Ben has a whole lot of junk on his balance sheet.

[Anonymous]

Totally agree. That is it from Sir Greenspan.

[zeropointfield (not verified)]

capitalism

[Anonymous]

The biggest bubble will be the last one, and it will likely
be in Federal Reserve Notes.

[Anonymous]

The debt bubble that got going in 1997 and was finally pierced in 2007 (by the slightest hint of deflation) was the cause of the "crisis". The real estate bubble was contained within the aforementioned debt-bubble and resulted from the foolish monetary policy response to the dot-com crash.

It seems safe to say that the markets will eventually have to realize the losses (80-90 percent) that were coming last fall, or a decade or two will have to pass in order to remove the massive debt overhang. Once one or both of those conditions are met, some amount of normalcy may indeed return.

[Anonymous]

Let`s face it, if the government/sec is allowing certain financials to basically cook the books, what stops other companies. Morally, perhaps legally, they could argue for similar leniency regarding accounting practices. Worst case is a slap on the wrist and the government really has no incentive at this time to bring reported earnings down or create doubt on stock market valuations.

When there are so many crooks and most aren`t getting caught, insiders are incentivized to create optimal stock prices to cash out their options before the next leg down.
I suppose this is another possible bubble to be added to the list, although insiders have apparently been cashing in lately.

[Anonymous]

Can anyone explain what is wrong with a bubble?

What would be the satisfactory expected alternative to any rising/falling prices for any market? No change?

Liquid

[Anonymous]

hmmmm...

Well, a bubble is something that would be too disruptive if it pops, i.e. the fed (or someone) is supposed to remove the punch bowl before the party gets out of hand.

Moving the bubble to other assets (sort of like a pub crawl) is not the answer.

[JohnKing]

Bubbles are just that, they are not sustainable, so you inevitably end up with a crash; bubble > crash > bubble > crash. You can probably do well playing bubbles and crashes if you are lucky/astute enough to see the tops and bottoms but for the majority of the population that isn't sitting in front of their PC with robo-zombie trading software these boom/bust cycles are just an assault on their personal wealth. Healthy economies need stability.

[Anonymous]

I assume that you are still employed or financially independent.

[steve from virginia]

Hmmm ...

Left out are two great (Great) bubbles:

   - The healthcare bubble which is 16% of GDP (US).

   - The higher education bubble.

Both are supported by lending/subsidy programs of long standing and are being stuffed with liquidity every second. Both have (enjoy?) broad public participation. Signs of collapse are evident in both bubbles as well. The collapse of the healthcare bubble will be shocking. Large insurers and pharma companies will fall bankrupt. Hospitals will close as will doctors' practices. The 'death panels' argument will be moot; people will have elderly relatives die at home rather than allow nursing homes to steal family funds. The outcome is that senior care - a profit center to the health and sickness industry - will collapse. This in fact may be the trigger that deflates this particular bubble.

Our spiraling energy- centered depression will make all much more hard- nosed about money, estates, health costs and legacies. Squeamishness about death will be a fkrst casualty.

As for the higher education bubble - in the upcoming post peak- oil world, an ability to repair a gasoline engine will be of greater utility than a degree. Who will fall first? Harvard? Or Berkeley?

[MinnesotaNice]

Enjoyed the article Leo...

'One thing he said is that Goldman Sachs is now taking risks that paid off, but if everybody feels pressured to emulate them, then they will be building new systemic risk all over again. That is one fundamental flaw of the whole financial system that has yet to be addressed.'

I don't think they have addressed any fundamental flaws in the financial system so far as I can see...  they have just increased the flaws with moral hazard, changing accounting rules, ...

[JohnKing]

Kamikaze Ben need another bubble fast so he hands GS and others cash to make one. They are doing exceptionally well. Is this the fastest bubble ever created? I know RE took some time, as did dot-com, maybe there is a correlation in the speed of creation to the length of time before the pop. If so, this will be a quickie.

[MinnesotaNice]

I am thinking your thoughts...

[Lionhead]

I'd like to add one additional issue; yesterday some ex Lehman person was on CNBC saying they noticed mortgages defaulting in 2007 but the employment reports were positive. They couldn't figure out why this was happening. The manipulation/fraud of gov't data confuses and confounds the quasi professionals on Wall street. They're herd followers and monkey see/monkey do folks. The distorted statistics add to the risk that they take, as their models and risk decisions are based on wrong numbers and assumptions. This risk factor then makes their business models problematical at best, dangerous at worst, and primed for future failures.

Until all these factors are recognized by "regulators" the monkey see/monkey do bubbles will continue to blow until the whole system finally goes down.

[MinnesotaNice]

Important point...

[Anonymous]

i'll bet the trifecta of gold, china/emerging mkts, and fed stupidity!

the 'performance-enhancing drug' that wins this race will be dollar devaluation.

green is good, but a longshot because the economic reality of third-world debt servitude is dirty. without massive gov't subsidies (with what money?) to spark a revolution, green is unlikely to inspire the kind of frenzy that only fear and greed can- plus it has the added drawback of requiring forward thinking.

securitization, under an assumed name, will continue trotting at a slower pace.

i think the best odds- although they're still remote they are growing- is a china-led precious metals bubble. the future squeeze will be in currencies and messy paper promises- all that garbage is going to seek security in the real thing, and hopefully in those who produce said real thing.

[Anonymous]

the idea that the players on wall street are not leveraged anymore is possibly true but possibly not. the first bubble popped on the most exposed outer layer of leverage, but this bubble might be an onion bubble. after the first wave of selling, the banks teamed up with government to lock up buying and selling with a goal to 'manage' the market back to an orderly process of buying and selling. EVENTUALLY government will be forced to either nationalize most assets or to stop backstopping them and let them back to the market. when this happens, you will find out if there are more layers of leverage exposed to sharp sell offs or not.

a tremendous wave of defaults is coming. and this will place selling pressure on assets. if the market is inactive, this pressure will be bottled up further, only increasing the possibility of the nationalization-or bubble pop-dichotomy.

3 things happened to explain the 'lockup' which supports the notion that the outcome in our immidiate future remains unpredictable..

. 1--the fed 'bought' securitized assets. if the fed ever hopes to sell these things again .....which it might not (and just let tax payers eat the default losses by nationalizing these assets.)

but if it tries to sell these things soon ( in the next few years) there is no one that will buy them on wall street without using alot of leverage. (provided by the fed or a huge bank most likely)

2) the fdic is sitting on its hands allowing the large banks to continue off balance sheet financing to remain off balance. whatever supposed actions the fdic has taken to make these banks disclose the mark to market values is more or less balogna. until there is full disclosure you will not know how leveraged these banks remain. the waiting game is still being played and these banks are not going to book lossess by selling off balance sheet assets until they are reasonably sure another big bank won't go under, or until they are forced to for internal funding reasons.

*3) the fed has lent enormous sums of money to many banks and it is possibly just a huge secret. the fed won't open itself up and the ongoing lawsuit between bloomberg and the fed has yet to be resolved. there is another lawsuit between fox news and the fed, but somehow i'm very wary of this lawsuit as it's possible the lawsuit is strategically designed to influence the outcome of the appeals of the bloomberg lawsuit in a negative manner. .....this is not crazy talk. sometimes you see multiple 'activist' lawsuits in controversial areas of law where different lawsuits are competing to get heard by the supreme court. whichever one actually gets to the supreme court wins the opportunity to define the debate. (and if you don't think newscorp won't need billions worth of loans from wall street , then you're not following the spate of media-empire bankruptcies recently. and you can bet the fox lawsuit is personally directed by rupert murdoc. )

[Anonymous]

Gold is not a bubble. The higher value of gold is the result of all other bubbles.

[TumblingDice]

This is a pretty simple concept that is lost on a lot of people. Gold is a currency.

[JohnKing]

I like that. Gold as a bubble indicator.

[taraxias]

Thanks, Leo. Always enjoy reading your stuff.

IMO as long as there is a risk of a currency crisis (and the FED's actions are making damn sure of that), gold will continue to shine. It's not about blowing a bubble, it's about finding a medium for wealth preservation when fiat money collapses.

The end of the fiat money system backed by nothing more than a promise and faith in bankrupt countries is looking like a certainty with every passing day.

Gold has a lot of upside yet.

[Anonymous]

I am not being sarcastic or ironic here, I am genuinely confused about claims of gold as a store of value. Back in 1978, gold traded at about $800. So now, 30 years hence, gold is approaching $1000 (and we aren't even talking inflation-adjusted dollars). This is an impressive track record? I'm sure you could have made a decent return over the three decades trading the ups and downs if you did it right, but I don't see any value manifested here. Please 'splain.

[Gunther]

First, get the facts straight. At the high of the year in 1978 gold was trading at 234 $. (London Fix) The high of the bull market was early 1980 at the famous 850$ one afternoon in New York. From there it went to less then half and made a lower high around 700.

The last bull market in gold was over, as visible as the burst of the dot.com 2000. Around the same time gold bottomed.

Since then gold did better then stocks.

If you think that now is a situation similar to 1980, gold will be a bad advice; if you think the current situation is more like a pause in a bull market with a possible resume of the bull coming, gold is the place to be.

Decide for yourself.

[Anonymous]

I am not being sarcastic or ironic here, I am genuinely confused about claims of gold as a store of value. Back in 1978, gold traded at about $800. So now, 30 years hence, gold is approaching $1000 (and we aren't even talking inflation-adjusted dollars). This is an impressive track record? I'm sure you could have made a decent return over the three decades trading the ups and downs if you did it right, but I don't see any value manifested here. Please 'splain.