Prepare for the biggest blow up ever

Jul 25, 2014

Normandy, France

Oh...the flesh is weak!

Not much action in stocks yesterday. Gold continues to fall...down $13 yesterday, to close below $1,300.

Meanwhile, Alan 'Bubbles' Greenspan is back in the news. At 88 years old, his mind is still sharp as a tack. That is, he sees his own interests clearly and is clever enough to distort the facts to suit them.

Specifically, asked in an interview what he thought of Janet Yellen's IMF speech, in which she maintained that bubbles should be addressed with more regulation, he replied:

    Bubbles are functions of unchangeable human nature. The obvious question is how to manage them.

    All bubbles expand, and they all collapse

You see, it wasn't his fault that the largest bubble in half a century blew up a year after he left his post as manipulator-in- chief of the world's largest economy. It was just human nature.

Of course, human nature is implicated in bubbles. But human nature is always with us. Bubbles are not. So, when we talk of the 'cause' of a bubble, we have to look the specific conditions that cause prices to get out of control.

--- Advertisement ---
2 Things You Need To Know Before Investing In Small Caps...

You already know that small cap companies offer an opportunity to earn big returns.

However, there are two things you need to know before you start investing in them...

Firstly, not all small caps hold the potential of giving high returns. Second, you shouldn't expect them to make you rich overnight.

Having said that, how can you still go about selecting small cap stocks that could help you make a lot of money in the years to come?

Well, we have a readymade solution ready for you!

Just click here for full details...

There was no bubble in '50s. Nor in the '60s. There were some important price movements, but the first thing that would qualify as a bubble was the extremely gaseous price of gold in the '70s. Then, gold rose from $42 an ounce to $800. What caused that? Human nature? Yes, in a sense. But it was the natural cupidity and larceny on the part of US officials. In 1968, they defaulted on their obligation to citizens and taxpayers to exchange dollars for gold at a fixed rate. In '71, they reneged on this obligation with respect to foreign central banks.

This - and double-digit inflation rates - so worried investors that they shifted assets suddenly and emphatically to gold to protect themselves.

That proved to be a bad move when Paul Volcker pricked the bubble in the early '80s, as Greenspan himself acknowledges:

    When bubbles emerge, they take on a life of their own. It is very difficult to stop them, short of a debilitating crunch in the marketplace. The Volcker Fed confronted and defused the huge inflation surge of 1979 but had to confront a sharp economic contraction. Short of that, bubbles have to run their course.
But... "How they are financed is critical..." he added. Follow the money. Who caused the inflation surge in the '70s? Where did the excess money come from?

Mr. Greenspan shows no interest in sniffing after the trail of cash. The old hound gives up the hunt even before he begins, changing the subject to what the feds did after the bubbles blew up.

    ...on Oct. 19, 1987, the Dow Jones Industrial Average fell 23% - an all-time one-day record, then and since. Goldman was contemplating withholding a $700 million payment to Continental Illinois Bank in Chicago scheduled for the Wednesday morning following the crash. In retrospect, had they withheld that payment, the crisis would have been far more disabling.
Yes, allowing the markets to run their course would have been 'disabling.' It would have disabled the bubblemobile. Investors and speculators would have been on notice: you're on your own!

Instead, Greenspan intervened. The central bank let it be known that it had Wall Street's back. This is where the 'Greenspan put' concept came into play. In case prices fell, the cronies knew that the Fed would bail them out.

So, the bubbles kept coming .

The dotcom bubble blew up in 2000. The real estate/finance bubble blew up in 2007. And now, prepare yourself for the biggest blow up ever - when the credit bubble finally reaches its limit.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Prepare for the biggest blow up ever". Click here!