Out Of Bubbles

Yesterday’s market rebound had the bullish crowd finally doing some chest pounding after the downturn of the past 2 weeks. Does this mark a turn in the market place or will the bulls remains in hibernation?

Bill Fleckenstein had this to say in his article titled “We’ve run out of bubbles:”

I’ll begin the New Year with this comment: There are no bullish interpretations for the stock market’s action thus far. This tells us that 2008 will be the year when reality finally overtakes the Goldilocks crowd.

Of course, we should expect the bulls to regale us with stories about a proverbial second-half rebound — the possibility of which is approximately zero, in my opinion. We should also expect believers in that hypothesis to spark a rally from time to time, based on hopes of surprise interest-rate cuts and on actual cuts.

But their efforts will become progressively less effective. (Anyone seeking a road map to how that might evolve can look at the market’s responses to the rate cuts from 2000 through 2002.)
Irresponsible liquidity originally emanating from the Federal Reserve and then-chief Alan Greenspan (a subject I cover thoroughly in my soon-to-be-published book), coupled with reckless acts of deregulation, have created the problem we now face. The country has gone “all in” via the credit-bubble-inspired housing bubble, which is now unwinding.

I do not believe there is a potential bubble left that could bail us out, nor do I believe a bailout should be attempted. Likewise, I do not believe any quick fix exists.
What I do see as the real solution is to let the creative destruction of capitalism finally run its course, after having been held back for a couple of decades.

I know I’ve said it before, but it bears repeating: Capitalism involves booms and busts. There is a phenomenon known as the business cycle that loosely revolves around those booms and busts. The policies of Greenspan and the Fed suppressed those busts, and “risk” was more or less struck from the lexicon of the English language (while linguists have pronounced “subprime” their word of the year).

If we stop attempting to bypass the creative destruction of capitalism, we will finally be able to bring about a recovery built on a solid foundation instead of the quicksand underlying the 2003-07 “recovery” that was built on the housing mania. Though I would like to think the politicians and the Fed get the message and will let the process play out, I am not going to hold my breath.

Bill offers other interesting thoughts, and I suggest that you read the entire article. If you’re looking to add gold to your portfolio, you may want to examine his arguments on “why gold is going higher.” Again, this is just one opinion and is not to be confused with a recommendation to buy.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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