Replies to post #5397 on Sector Investing

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Debtor Nations Dream of Deflation
Think this bubble is big? Wait until you see the next one. Part One of three.
ericjanszen [Trident Capital] / POSTED: 04.06.05 @01:21

http://www.alwayson-network.com/comments.php?id=9646_0_24_0_C

"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."

—Alan Greenspan, appearing before the Senate Banking Committee on Feb. 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.

In my last column, I asserted that since the 1970s, when the world adopted the current floating exchange rate currency system that made the dollar the world's reserve currency, the Fed has overseen four asset bubble cycles. The first was the inflationary boom that topped out when gold peaked at $850 (about $2000 in 2005 dollars), then collapsed in 1981. A second bubble occurred in the early 1990s that engaged all asset classes, the one bubble of the four so far that the Fed has acknowledged was a bubble. The Fed said in FOMC meeting minutes that with its tightening in June 1994, it "very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation." The liquidity provided to get the banking system on its feet again led to another bubble in the late 1990s that was concentrated in the stock market. It collapsed nine months after the Fed started to withdraw liquidity from the markets in 1999.

The bubble we are living in today—the fourth since the Bubble Cycle started in the 1970s—is a side effect of the monetary and fiscal stimuli that was applied to counter the deflationary impact of the collapsing 1990s stock market bubble. As Martin Mayer said in his book The Fed: "The truth is that liquidity, the only significant weapon remaining in the central bank's arsenal as decision making moves to the markets, will not necessarily go where you want it to go when you need it to go there." Today's bubbles are concentrated in the real estate market, a side effect of a less visible bond market bubble. However, most asset classes are involved, including stocks, the dollar, and commodities. The Fed started the latest tightening cycle eight months ago. If the pattern of the past three bubbles is an indicator, we can expect some of these bubbles to start to deflate this spring.