As you know, a Battle of the Bubbles is going on. The worldwide bubble in liquidity is still getting bigger and bigger. The European money supply, for example, was shown to be growing at its fastest pace in 17 years. The supply of the local currency in India is growing at a 21% annual rate. In the United States, the authorities no longer report M3, the broadest measure of money supply. But experts have clocked it growing at about 10% per year – three times faster than the goods and services it is meant to buy.
Where all this money is coming from is a long story. Where it is going is simpler. It is going into financial assets, which have been going up many times faster than consumer prices.
One day of course, the whole process has to go into reverse. That’s a long story too. But never was there a bubble that kept expanding infinitely. The reason for that is simple too. By definition, it is an anomaly. It means that certain things are growing much faster than other things – bonds faster than gold…or Chinese stocks faster than retail stocks. Imagine a man’s nose growing faster than his face…or cars growing faster than the roads they are driven on. If this were to continue forever, the whole world would be ridiculous. That’s why there are ‘corrections‘ to put things back in order.
Right now, the Big Bubble Battle is a fight to determine how and when the worldwide liquidity bubble gets corrected. On the one hand, the U.S. housing bubble is deflating. On the other hand, the amount of cash and credit in the world at large – judging from the money supply figures – is still increasing.
And last week, a new battle zone opened up. Equities – especially those in China and emerging markets – suddenly started taking incoming fire. All around the world, stock market investors rose up to attack bubble level share prices. The following day was calm. And then, the Dow dropped more than 200 points before staging a wobbly recovery. It ended the day still about 360 points below where it began on Monday. Asian markets continued to go down – with Chinese stocks giving up another 2.7%.
Meanwhile, central bankers in Beijing, Brussels, Tokyo and Zurich warned that there was too much speculation going on…and that they were going to do something about it. So far, they haven’t done much…but there’s always tomorrow.
And last week, too, former U.S. Federal Reserve chief, Alan Greenspan, first told an audience in Hong Kong that as far as he was concerned, a United States recession in 2007 was nothing to laugh at. On Thursday, he backtracked, after being accused of causing the sell-off himself. “By the end of the year, there is the possibility, but not the probability of the United States moving into recession,” Greenspan is reported to have told another audience.
His earlier statement was, “probably misinterpreted, that’s why we see a clarification today,” said Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong.
Our guess is that it wasn’t misinterpreted at all. Greenspan has long made a habit of saying anything people want to hear. After people told him that his ‘recession’ comment was unwelcome, he took it back.
Ben Bernanke, too, took the microphone to tell investors what they wanted to hear. Recession, he asked? He didn’t see any recession.
Even “Freddie Mac Tightens Standards”, says the New York Times. And mortgage defaults – so far limited to ‘subprime’ borrowers – seem to be busting into better neighborhoods.
“Mortgage Defaults Start to Spread”, begins an article in the Wall Street Journal.
The WSJ reports that a record USD $400 billion of midlevel loans – better than subprime…but not quite prime prime – were originated last year. Now, these loans too are beginning to come under fire.
So now the war is on. Manufacturing in the United States has practically run up the white flag. Housing is under siege. And this week showed that stocks were vulnerable too.
We don’t know, but our Crash Alert flag is flying. Our money is tucked away. The bar at the beach shack is stocked and ready for our return. Heck, if the going gets really rough…we’ll take another vacation!
Markets and Money