Friday, October 16, 2009

America's Bubble Addiction

Happy Friday!

It's happy hour so I will try to be brief. I wanted to share today's CNBC interview with Yale's Robert Shiller. Dr. Shiller in my mind is one of the strongest voices of reason when it comes to the financial markets and bubbles.

One of Dr. Shiller's consistent views on bubbles is that psychology is the key element as to how bubbles form and then burst.

He was asked about the current "rebound" in housing and his take IMO is right on the money:

Final Take:

So are we about to see housing bubble #2? This remains to be seen, but I am leaning the same way Dr. Shiller is which is the likelihood of this occurring is high.

I say this because this recovery has been too predictable given the horrible state of the economy. As Dr. Shilling explains, our addiction to bubbles is probably as powerful a force as the housing tax credit when it comes to explaining the powerful reversal in home prices.

The 800lb gorilla in the room when it comes to housing's future is interest rates moving forward. The risks of rates rising are extremely high IMO.

The main threat of higher rates of course is inflation. We are already seeing increasing prices as a result of a falling dollar. Oil has touched $77 in the past couple days. Gold remains firmly over the $1000 level. These are some of the "unintended consequences" when you print money in an attempt to keep the USA's debt bubble inflated.

The Fed eventually will be forced to address the falling dollar. What's the easiest way to strengthen the dollar? Why raise rates of course. Higher interest rates down the road could very well trigger another housing collapse.

Also, keep in mind that the Fed's quantitative easing fund is now down to a measly $3 billion. That's the equivelant of a penny when you have a deficit of over $10 trillion dollars like we do.

The question I have regarding the QE is this: If the Fed doesn't replenish the QE program, will the bond market sell off treasuries in an attempt to force the Fed's hand in terms of what their next plan of action is?

If the Fed does decide to extend the QE program, what will the dollar look like as a result? Something tells me a piece of toilet paper may be worth more than a greenback if this insanity continues.

The bottom line here is the Fed has no way out of this mess. If they decide to pull the liquidity from the markets, housing will once again get decimated because higher interest rates will rise and that combined with tighter lending standards will once again force prices to tumble.

If the Fed continues to QE, inflation is going to soar and $200 oil will be right around the corner.

IMO, Stay on the sidelines if you are looking to buy a house. The recovery we are witnessing in real estate is a nothing but a "housing bear market rally" and the speculators/bubble makers will once again take it on the chin.

Disclosure: Short treasuries via TBT in longer term accounts.


getyourselfconnected said...

You nailed it. I cannot give a reasonable picture going forward until the resolution of the FED's intention on a second QE adventure is made clear. As Yoda said to Luke "On this all depends!". While I have issues with how the FED operates (no need to expound) they were effective in driving 300 Billion is printed money into the stock market, and this move sucked all kinds of other money in with it. Can a purely stock based rally mean real growth in an economy? We shall see, but if Januray rolls around and things are looking poor, QE2 will be on the way and then we are really going to know what's up.

Enjoy your Friday. I will have the first installment of Friday Night Video fights tonight.

JoeMI said...

There's far more than $3 billion left in the QE pot. Don't forget about the much more MASSIVE $1.25 trillion purchase of MBS and agency securities by the fed. I think they still have about $300 billion left to "spend." Then again, this is a completely arbitrary number and they can decide to buy (print) more at any time.

Jeff said...


I will be over later to check it out. totally agree with your thoughts.

Great points. Q1 earnings are going to be a nightmare IMO.

My short hat will likely be back on. I am hopeing the DOW gets back to 10,300. Technically thats a perfect place to put shorts positions on.

Jeff said...


Great point on the MBS. Not sure the bond market cares as much about that.

The banks certianly care. The treasury purchases are what directly effect bonds and thus rates.

Like you said, they have options. They could redirect that money into treasuries or simply print more money.

If they reallocate the MBS money waht happens to the
MBS market?

What a total cluster****.

Scary times for sure.

getyourselfconnected said...

Way off topic, but Friday night video fight is ON!
I love it.

Tom said...

Hi. Jeff

Have you bought any actual gold, like gold coins? And if so do you have recommandations on where to purchase gold?

jeff said...


I do not. I own the etf GLD. GLD has the 4th largest reserve of gold holdings. I may pick up some physical as things deteriorate. For now I am happy with where I am at.

getyourselfconnected said...

Any and all,
gold in the physical posession sense is a huge move. Please do plenty of research and understand the risks. At this point in time, proxies like GLD or miner baskets are good enough. Having and storing gold is a big commitment.

Want to hold a bunch of real value, go with silver!

Jeff said...


Great advice

I totally agree. Don't own the physical unless you have a place to safely store it.

When I say safe I mean placing it in a safe that is bolted into concrete and cannot easily be removed.

Any other safe is a horrible place to put gold because it's the first place a robber will go.

Be careful with the metals!

Tom said...

Thanks Guys

Why silver instead of gold?

getyourselfconnected said...

This is not investement advice, nor is this my ste, so I only will offer my 2 cents:
-I love silver for all the same reasons I love gold
-Silver is a consumed metal and thus it is depleted at a fairly good clip (of course this add volatility to the price as well)
-You can have some physical silver on hand and not get all paranoid about it
-Silver usually will command less over spot that gold

My own favorites are Mexican Libertads, Austalian Kookaburras, and Canadian Maple Leafs. Old pre 1965 US dimes and quarters are 90% silver, and if the world ends will be accepted as silver money. These things are impossible to find in your own change (1980 silver melt) but you can buy them plenty of places. A local coin shop here had a whole bunch and when I asked about them the owner said "oh, you are one of those guys", I was laughing. Still he let me buy all I wanted for jut 1% over spot price. This may not be typical.

Tom said...

Thanks Get

That clears things up a bit. At lot of sites I read people are buying gold, mostly in the form of coins.

Anonymous said...

dont see a housing recovery happening, let alone another bubble. the conditions dont exist for it.. housing is dead, next bubble will prob be stocks.

Anonymous said...

Hello - lexapro medication
However common, these side effects cannot be easily anticipated, thus one needs to keenly watch out for these signs and symptoms.
[url=]purchase lexapro[/url]
If you seek to end your anxiety or depression perhaps a trial of Lexapro would be a good step for you.
lexapro for sale
The adverse effects of Lexapro, same with the side effects, are also unanticipated, and therefore, one should be very observant and knowledgeable about the negative effects of these type of drugs.

Anonymous said...

Hello - phentermine online pharmacy
This is because over time one can develop a dependence on the substance.
[url=]phentermine no prescription[/url]
Schedule the visit and start losing weight today!
Phentermine is available in at least 20 medications so it may be confusing deciding which to go with.
generic phentermine
This is because over time one can develop a dependence on the substance.

Anonymous said... - alprazolam online

Xanax is given to patients with anxiety associated with depression.
[url=]xanax medication[/url]

Remember, an ounce of caution is always a must when getting maintenance medications.
xanax cost

Panic disorder and anxiety disorder
Xanax must not exceed 8 weeks in treating panic disorder.

Anonymous said...

I would just like to take some time out Thank all the people for doing what you do and making the community what it is im a long time reader and first time poster so i just wanted to say thanks.

Anonymous said...

Hello swantosad zithromax without prescription Before prescribing this medication, the doctor has to examine and evaluate a detailed medical history of the patient which must mention previous record of allergies to macrolide antibiotics, heart rhythm rate, and liver disease, any complexity with kidneys or long QT syndrome. [url=]zithromax antibiotic[/url] Zithromax the antibiotic Buy Zithromax (Azithromycin) medication at very competitive price. - buy zithromax Overdose may create some side effects.

Anonymous said...

Hello, viagra without prescription
The rarest of side effects associated with Viagra are eye problems including bleeding, decreased vision, different shades of colors, and temporary blindness.
[url=]generic viagra online[/url]
This does not eliminate the chance of this happening to you however. - viagra no prescription
You should always be careful when taking medications for the first time, so make sure to report anything out of the ordinary if you will be taking Viagra.