Bubbles… Busts… Bubbles… Busts…

The beat goes on – one sector gets pumped up…and then it gets whacked.

Jim Cramer says he’s never seen anything like it…

Not the crash of Drexel Burnham Lambert in the ’80s…not the Asian currency crisis…not the LongTerm Capital Management blowup…not the dotcom bust…

Now, he says, the mood of gloom on Wall Street just gets worse and worse…with no sign of let up. Thousands of layoffs. Stocks in steady decline.

That makes us a little sad, here at Markets and Money headquarters. We don’t like to kick an industry when it is down…and we like kicking Wall Street.

But you can see why the former Masters of the Universe are so blue – their bonuses are falling. So is the value of their stock options.

“Banks struggle to get capital,” begins an article in the Wall Street Journal.

When JP Morgan bought Bear Stearns, for example, everyone thought they had stolen the company. It was clearly the bottom – or so they believed. And they had a $30 billion guarantee from the feds. What could go wrong?

But the whole financial sector has continued to sink…and now J.P. Morgan’s deal is looking less sure.

(Even the best of companies – such as Warren Buffett’s Berkshire Hathaway – are getting beaten down. Berkshire traded at over $1,500 last December. Now, the share is down to $1,220.)

Yesterday, the Dow held steady. But last week was a bad one…with stocks losing 3.8% and the Dow falling below 12,000. Oil gained another $1.38, bringing the going rate for a barrel of crude to $136.

The dollar gained against the euro, and gold fell $16.

What is amazing about Cramer’s point of view is that he seems to be surprised. What did he think? That the bubble in the financial industry could expand forever? Or that the Fed could pump it up again, even after it sprung a major leak?

Sorry, Jim, it just doesn’t work that way.

The financial industry used to represent about 10% of the entire stock market’s earnings. Then, as credit grew, the financial sector invented new ways to separate people from their money. During the period known as the Great Moderation, the percentage of earnings coming from Wall Street rose to 40% of the total. Now it’s coming back down. It’s over.

We don’t have to tell you, but the ‘Great Moderation’ was a big fraud. There was nothing moderate about it. Instead, it was a period of extravagance…excess…over-the-top consumption and borrowing…and outlandish claptrap. It was claimed, for example, that the Wall Street firms were “adding value” by packaging subprime mortgages into securities and peddling them to towns in Norway. And it was believed that the Fed really had learned how to smooth out the business cycle and could henceforth avoid serious downturns. And inflation? That was a problem of the ’70s…not of the 21st century.

But every bubble pops. And the force of a correction is equal and opposite to the deception that preceded it. Naturally, the correction in the financial industry would have to be substantial. Nor is the Fed able to stop it. When a bubble bursts, the Feds can pump as hard as they want; the new cash and credit will go into a new bubble, not the old one.

You haven’t seen another bubble in the dotcom industry, have you? That one blew up eight years ago. It hasn’t come back – despite the best efforts of central banks all over the world. And don’t expect another bubble in housing either. We’ve seen the highest prices for housing – in real terms – that we will probably see in our lifetimes.

Bubbles…busts…bubbles…busts…the beat goes on. One sector gets pumped up…and then it gets whacked.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

6 Comments on "Bubbles… Busts… Bubbles… Busts…"

Notify of
Sort by:   newest | oldest | most voted

The fed’s monetary policy make it very difficult to invest just based on assets and profits. The fed’s manipulation is so powerful in creating booms and busts, that an investor is forces to look to the sectors going up.


…or we could just stop putting our hard earned money into the world’s greatest casino.

Jim Bonner

For years, Marc Faber has said that new money never goes into old, popped bubbles.

Fancy that.


you’ve been telling the same old story for years but you put it so simply and succinctly i always return to read these posts now and again. Obviously some people (such as Cramer) still need to be told.


“declines (in capital goods) were offset by gains in computers, appliances, commercial aircraft and defense equipment…Total orders excluding defense equipment decreased 0.6 percent as bookings for military gear rose 11 percent”

How typical for a country whose policy, any policy, is to shoot first and ask questions later if time permits (it never does). When both cumulative supply and demand, in aggregation, experience a downward shock (I don’t want to use the coined term because cliques give me migraines) then the only response is responsibility. It can’t be shot down with an avid gun culture.

Financial Bubble Is Ending Like Every Other

[…] Source: Bubbles… Busts… Bubbles… Busts… addthis_url = ‘http%3A%2F%2Fdev.contrarianprofits.com%2Farticles%2F3248%2F3248’; addthis_title = ‘Financial+Bubble+Is+Ending+Like+Every+Other’; addthis_pub = ”; Advertisement […]

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au