Expanding Credit Bubble Leaves Gold Price, US Treasury Notes Behind

Is the great worldwide bubble still expanding?

We checked our usual sources this morning.

And yes…after a few days of uncertainty last week when the Dow fell 400 points…the leak was quickly repaired and the bubble continued to expand. On Friday, just before the end of the session, the Dow pumped up 157.66 points or 1.19% to 13,424.39. Gold fell to US$650. The dollar rose.

It is now the 6th month of the 25th year of this historic expansion…and all is well.

Meanwhile, we got word, via Bloomberg, that there are still plenty of people eager to get into the party before someone calls the cops. Sales of CDOs (collateralised debt obligations) hit a record in the first quarter of this year – at US$251 billion for the three months they’re running at more than US$1 trillion per annum.

Bloomberg reports, “sales of CDOs pooling asset-backed securities increased 21 percent from the previous quarter. The derivatives are typically backed mainly by subprime mortgage bonds, or securities created from loans to homeowners with poor or limited credit histories.”

And yesterday, an old friend brought up another old friend,

“You remember Catherine?” he asked. “You know, she collects photographs. I mean, photographs from well-known people. Well, guess what? The market for photographs has gone crazy. Actually, all the collectibles have gone crazy.

There’s just so much money around, it’s stirring everything up. She had a few photos that she’d paid US$4,000 for, a few years ago. They’re going on the auction block at Christie’s this week. Guess what the guide price is? A half a million. It’s really unbelievable.”

See how easy it is to get rich, dear reader? Just buy something. Then, you wait a respectable interval, and then you sell it to someone. It’s so easy an idiot could to it. In fact, many of the people who are doing it are idiots.

They’re dumb enough to believe that asset prices always go up. And they’re getting rich because they don’t know any better. Oh, to be an idiot.

But what kind of wealth is that you get without working or saving? “The best kind,” say most people. But to us, it seems more like a case of false pretenses. It’s like a man who marries a rich widow…and then discovers that she’s as penniless as he is. Maybe it will work out, but maybe it won’t.

Here at Markets and Money headquarters, we confess that we’re too rich to steal…too dumb to lie…and too humble to profit from a credit bubble. To get rich in today’s wacky markets, you have to believe wacky things. We don’t mind believing wacky things, but the problem is the wacky things you need to believe today scratch uncomfortably against our sense of humility.

Today, you have to believe not only that over-priced financial assets are going up, but that you alone know which ones will go up most. And you also have to believe that you know better than Mr Market. Because, when you buy at the market price, you’re wagering that Mr Market has made a mistake and missed something. And then, you have to believe that when he gets around to noticing what he’s missed, the asset you just bought will have gone up in price.

The staggering arrogance of it is too much for us. We don’t buy things because we think Mr Market has bungled. We only buy things we think are of real value. But right now, where can you find a real value? In the stock market? In the property market?

How about Paraguay? Maybe. That’s where the Bush clan has bought a ranch. We think perhaps they were looking ahead to the time when they’d have to flee an angry American mob. They’ve probably made a deal with the Paraguayan government, letting them skulk down there after people get wise to what they are up to here. Or, maybe they were just looking at values.

According to International Living’s reports [at Internationalliving.com] – there is no place where you can get more for your money than in Paraguay.

Who wants to live in Paraguay, you ask? We don’t know, but we’ll check it out. You see, we just learned that we’re being exiled from France, so we too will soon need a place to hide out. We’ll give you a report when we get down there.

But let us return to the world’s first Worldwide Bubble. We notice one other thing – in addition to gold – that did not bounce up on Friday. That was the 10-year US Treasury note. It’s going down, which means that the price of credit is going up – despite the glorious gush of cash and credit from central banks, CDO investors and others. If the cost of debt goes up enough, of course, the credit bubble will blow up.

According to classical economic theory, an expanding credit bubble takes more and more credit to expand and keep output increasing. That is what we have seen for the last few years – higher debt/GDP. Economists now warn that the housing slump may have a longer-lasting effect on GDP growth than previously thought and (according to the most recent reading), actual GDP growth has fallen below the rate of population growth. As a credit bubble goes on, it becomes less effective at producing wealth…and more effective at producing what was most lacking in the first place – humility.

That means that if this book keeps at this rate, Americans will eventually be sneaking across the Rio Grande to look for work.

Maybe the Mexicans will build that wall before us.

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

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