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So what is the depth of the bubble?
- Thread starter rowenwood
- Start date
Let me ask you guys something. For those of you that think we are in a bubble market and are due for a crash, how much money have you made playing this theory out in the market? Anybody? Come on, how much money have you made shorting this runnup the last 11 months. Seriously, forget about what you think about valuations, the only valuation you need to know is the prevailing market price. An asset is worth what someone is willing to pay for it in the marketplace. That's it.
Quote from Mecro:
You gotta wait till mom & pop start rallying this market before you call a bubble.
IMO there have not yet been nearly enough classic sign of market top to be yet calling the end of this rally, even if there is a pullback over the next couple months...
However, whats different about this "jobless recovery" is that Mom & Pop haven't been experiencing job and wage growth since the last bubble so we may top out without the usual frothing at the top... less discretionary income to spend and still a too-recent memory of 401K's getting burned...
Paul
Slapshot, I need not look any further than a weekly chart of the Dow to agree with you
As for the rest of you guys, if you are saying that we should go with the trend as long as it lasts, I say, yes, thatâs good advice, but I will be keeping my bets smaller and time frames shorter at this stage. It will be interesting to see if the Dow can breach 10800.
On the other hand, if you are saying that thereâs nothing to worry about since stocks will be booming for years, I say, rubbish. The level of debt at 300% of GDP is too monstrous a bubble as it is for that to occur. And when this bubble pops, as we all know they always do, then god help us all. We cannot rely on the health as well as the ignorance of consumers and the stupidity of foreigners forever. Accordingly, my humble opinion is that anyone betting on the long term growth of the US economy is just as, if not more crazy, than anyone betting on an imminent collapse.
As for the rest of you guys, if you are saying that we should go with the trend as long as it lasts, I say, yes, thatâs good advice, but I will be keeping my bets smaller and time frames shorter at this stage. It will be interesting to see if the Dow can breach 10800.
On the other hand, if you are saying that thereâs nothing to worry about since stocks will be booming for years, I say, rubbish. The level of debt at 300% of GDP is too monstrous a bubble as it is for that to occur. And when this bubble pops, as we all know they always do, then god help us all. We cannot rely on the health as well as the ignorance of consumers and the stupidity of foreigners forever. Accordingly, my humble opinion is that anyone betting on the long term growth of the US economy is just as, if not more crazy, than anyone betting on an imminent collapse.
"An asset is worth what someone is willing to pay for it in the marketplace. That's it.": yes that's just how a bubble can exist because there are some fools who can't make the difference between real growth and growth with debts. And there are not so many sellers during a bubble since the bubble wouldn't exist haha !
And that's how Enron, Japan's collapse and perhaps next America collapse will happen. The incredible low interest rate in Japan has preceded the big crash. A low interest rate allows the bubble to be financed by DEBTS and generate FAKE GROWTH of GDP : this is accounting trick that has been used at least since John Law and his fake Bonds - since he was at the head at the Central Bank - during the Mississipi Bubble. Keynes Socialist Theory that Debt doesn't matter is nothing more than the renewal of John Law's theory. History just repeats but people always think that this time is different. Above all they are very prompt to see Japan's collapse as an economical mistake and when the same mistake is commited in their own country oh no it can't be that the law of economy will apply to us: we are protected by Miracles haha !
And that's how Enron, Japan's collapse and perhaps next America collapse will happen. The incredible low interest rate in Japan has preceded the big crash. A low interest rate allows the bubble to be financed by DEBTS and generate FAKE GROWTH of GDP : this is accounting trick that has been used at least since John Law and his fake Bonds - since he was at the head at the Central Bank - during the Mississipi Bubble. Keynes Socialist Theory that Debt doesn't matter is nothing more than the renewal of John Law's theory. History just repeats but people always think that this time is different. Above all they are very prompt to see Japan's collapse as an economical mistake and when the same mistake is commited in their own country oh no it can't be that the law of economy will apply to us: we are protected by Miracles haha !
Quote from Maverick74:
Let me ask you guys something. For those of you that think we are in a bubble market and are due for a crash, how much money have you made playing this theory out in the market? Anybody? Come on, how much money have you made shorting this runnup the last 11 months. Seriously, forget about what you think about valuations, the only valuation you need to know is the prevailing market price. An asset is worth what someone is willing to pay for it in the marketplace. That's it.
For those who ignore but are willing to learn the basics about the interelation between money, bonds, debts and tax read a pedagogical document from Congress:
MONEY FACTS
SUBCOMITTEE ON DOMESTIC FINANCE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
88th Congress, 2nd Session
SEPTEMBER 21, 1964
http://landru.myhome.net/monques/moneyfacts.html#MONEY
already posted in the thread "What Howard Buffett, father of Wall Street legend Warren Buffett said on Gold "
http://www.elitetrader.com/vb/showthread.php?s=&threadid=27791&perpage=6&pagenumber=3:
47. Where does the Federal Reserve get the money with which to create bank reserves?
It doesn't "get" the money; it creates it. When the Federal Reserve writes a check, it is creating money. This can result in an increase in bank reservesâa demand depositâor in cash; if the customer prefers cash, he can demand Federal Reserve notes, and the Federal Reserve will have the Treasury Department print them. The Federal Reserve is a total moneymaking machine. It can issue money or checks. And it never has a problem of making its checks good because it can obtain the $5 and $10 bills necessary to cover its checks simply by asking the Treasury Department's Bureau of Engraving to print them.
48. Who gave the Federal Reserve the power to create the money necessary to cover its checks?
The Congress. Because this power to create money is given by the Constitution to Congress, only the Congress can delegate this power. And this it has done in creating the Federal Reserve Systemâan agency of Congress authorized to create money.
49. How does the Federal Reserve change the money supply?
First, by increasing or decreasing the amount of bank reserves which the member banks of the Federal Reserve System have to their credit on the books of the Federal Reserve banks. Second, by regulations which tell the member banks the maximum amount of bank deposits they may create per dollar of reserves.
50. What is the formula that determines the maximum amount of money available to business and consumers?
Expressed mathematically this is a simple formula A Ã B = C where: A = Amount of bank reserves; B = Number of dollar deposits member banks may create per dollar of bank reserves; and C = Total bank deposits.
51. Can the Federal Reserve authorities change the money supply formula?
Yes. They can change either or both parts of the formula at any time, and they frequently do change one or both parts. There are certain limits set by the Federal Reserve Act to the changes the authorities can make. But these limits are extremely wide.
52. Does it make any difference which part of the formula the authorities change when they wish to increase the money supply?
Yes. Although the effect on the money supply of changing either part of the formula may be the same, the total economic effects differ depending on which part of the formula is changed. For example, when the Federal Reserve lowers reserve requirements, all of the new money is created by the commercial banks through their lending and investing activity. This obviates the necessity of transferring Government securities from private to public hands. On the other hand, when the Federal Reserve increases reserves by, say, purchasing U. S. Government securities, the interest income on these securities goes to the Federal Reserve System. Since the Federal Reserve turns over to the U. S. Treasury most of its earnings, the net effect of increasing the money supply by increasing reserves is to favor the private banking system. So, when the Federal Reserve officials decide to increase the money supply, whether they favor the U. S. Treasury or the private banks does make a differenceâin the amount of taxes you, I, and all other taxpayers must pay.
MONEY FACTS
SUBCOMITTEE ON DOMESTIC FINANCE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
88th Congress, 2nd Session
SEPTEMBER 21, 1964
http://landru.myhome.net/monques/moneyfacts.html#MONEY
already posted in the thread "What Howard Buffett, father of Wall Street legend Warren Buffett said on Gold "
http://www.elitetrader.com/vb/showthread.php?s=&threadid=27791&perpage=6&pagenumber=3:
47. Where does the Federal Reserve get the money with which to create bank reserves?
It doesn't "get" the money; it creates it. When the Federal Reserve writes a check, it is creating money. This can result in an increase in bank reservesâa demand depositâor in cash; if the customer prefers cash, he can demand Federal Reserve notes, and the Federal Reserve will have the Treasury Department print them. The Federal Reserve is a total moneymaking machine. It can issue money or checks. And it never has a problem of making its checks good because it can obtain the $5 and $10 bills necessary to cover its checks simply by asking the Treasury Department's Bureau of Engraving to print them.
48. Who gave the Federal Reserve the power to create the money necessary to cover its checks?
The Congress. Because this power to create money is given by the Constitution to Congress, only the Congress can delegate this power. And this it has done in creating the Federal Reserve Systemâan agency of Congress authorized to create money.
49. How does the Federal Reserve change the money supply?
First, by increasing or decreasing the amount of bank reserves which the member banks of the Federal Reserve System have to their credit on the books of the Federal Reserve banks. Second, by regulations which tell the member banks the maximum amount of bank deposits they may create per dollar of reserves.
50. What is the formula that determines the maximum amount of money available to business and consumers?
Expressed mathematically this is a simple formula A Ã B = C where: A = Amount of bank reserves; B = Number of dollar deposits member banks may create per dollar of bank reserves; and C = Total bank deposits.
51. Can the Federal Reserve authorities change the money supply formula?
Yes. They can change either or both parts of the formula at any time, and they frequently do change one or both parts. There are certain limits set by the Federal Reserve Act to the changes the authorities can make. But these limits are extremely wide.
52. Does it make any difference which part of the formula the authorities change when they wish to increase the money supply?
Yes. Although the effect on the money supply of changing either part of the formula may be the same, the total economic effects differ depending on which part of the formula is changed. For example, when the Federal Reserve lowers reserve requirements, all of the new money is created by the commercial banks through their lending and investing activity. This obviates the necessity of transferring Government securities from private to public hands. On the other hand, when the Federal Reserve increases reserves by, say, purchasing U. S. Government securities, the interest income on these securities goes to the Federal Reserve System. Since the Federal Reserve turns over to the U. S. Treasury most of its earnings, the net effect of increasing the money supply by increasing reserves is to favor the private banking system. So, when the Federal Reserve officials decide to increase the money supply, whether they favor the U. S. Treasury or the private banks does make a differenceâin the amount of taxes you, I, and all other taxpayers must pay.
Nothing has changed since John Law:
http://cepa.newschool.edu/het/profiles/law.htm
Law's "Real Bills Doctrine" of money applied the "reflux principle" to the money supply. Money, Law argued, was credit and credit was determined by the "needs of trade". Consequently, the amount of money in existence is determined not by the imports of gold or trade balances (as the Mercantilists argued), but rather <font color=RED>on the supply of credit in the economy</font>. And money supply (in opposition to the Quantity Theory) is endogenous, determined by the "needs of trade".
http://mshistory.k12.ms.us/features/feature22/law2.html
Same thing for the Monopoly upon control of Money and Trade:
"MONOPOLY: a single supplier of a business or service, usually created by governmental regulations that prevent competition."
"Law would create cash flow from new economic activity. It turns out that the Mississippi Company was a small part of a much grander empire he was about to create. In September 1718 the company acquired the monopoly in tobacco trading with Africa. Law's Bank Generale was taken over by the French government in January 1719 and was renamed the Bank Royale. Law remained in charge, however, and the crown further guaranteed the bank's note issue. In May he obtained control of the companies trading with China and the East Indies. He renamed his entire business interest the Compagnie des Indes, but most people still called it the Mississippi Company. In effect, Law now controlled all trade with France and the rest of the world outside of Europe. "
http://cepa.newschool.edu/het/profiles/law.htm
Law's "Real Bills Doctrine" of money applied the "reflux principle" to the money supply. Money, Law argued, was credit and credit was determined by the "needs of trade". Consequently, the amount of money in existence is determined not by the imports of gold or trade balances (as the Mercantilists argued), but rather <font color=RED>on the supply of credit in the economy</font>. And money supply (in opposition to the Quantity Theory) is endogenous, determined by the "needs of trade".
http://mshistory.k12.ms.us/features/feature22/law2.html
Same thing for the Monopoly upon control of Money and Trade:
"MONOPOLY: a single supplier of a business or service, usually created by governmental regulations that prevent competition."
"Law would create cash flow from new economic activity. It turns out that the Mississippi Company was a small part of a much grander empire he was about to create. In September 1718 the company acquired the monopoly in tobacco trading with Africa. Law's Bank Generale was taken over by the French government in January 1719 and was renamed the Bank Royale. Law remained in charge, however, and the crown further guaranteed the bank's note issue. In May he obtained control of the companies trading with China and the East Indies. He renamed his entire business interest the Compagnie des Indes, but most people still called it the Mississippi Company. In effect, Law now controlled all trade with France and the rest of the world outside of Europe. "
Quote from harrytrader:
"The incredible low interest rate in Japan has preceded the big crash. A low interest rate allows the bubble to be financed by DEBTS and generate FAKE GROWTH of GDP : this is accounting trick that has been used at least since John Law and his fake Bonds - since he was at the head at the Central Bank - during the Mississipi Bubble. Keynes Socialist Theory that Debt doesn't matter is nothing more than the renewal of John Law's theory. History just repeats but people always think that this time is different. Above all they are very prompt to see Japan's collapse as an economical mistake and when the same mistake is commited in their own country oh no it can't be that the law of economy will apply to us: we are protected by Miracles haha !
The depth of the bubble will be the size of the losses in equities once the savers are given a satisfactory rate of interest in the banks...
This is reflective of a normal/natural economy...to reward savers...today the savers are simply depleting their hard earned resources...
This is reflective of a normal/natural economy...to reward savers...today the savers are simply depleting their hard earned resources...
Quote from BVM88:
Maybe the bulls here can explain how we are to get around all the debt that is vividly depicted in this chart:
I'm not a raging bull, but I'll have a go at your challenge...
First, an observation: the run-up in debt relative to GDP seems to have started in about 1982 and lasted through the 1980s and 1990s...that is, it was coincident with the greatest period of wealth creation the world has ever seen. BTW, recent data indicate that household net worth has regained the losses from 2000-02 and now stands once again at a record high.
Next, debt levels don't matter by themselves. What matters at the micro-level also matters at the macro level: debt-service and the debt-equity ratio.
Debt service is less of a problem to the extent that interest rates are low. All those folks who consolidated 18% credit card debt into a 4% home equity loan actually have improved their cash flow position.
And as I observed above, household net worth is at record highs so the debt-equity ratio can't be too shabby.
Further, we still have immense over-capacity in almost all sectors of the economy and will for at least the next couple of years. This is fundamentally deflationary and while I don't look for deflation I think it's hard to make a case for significant inflation just around the bend. With tame inflation, any rise interest rates will be modest.
In addition over the rest of this decade the global economy will receive a huge boost from the deployment of internet-based technologies throughout business and from the rapid growth (creation) of middle-classes in China, India and Brazil.
Not to be pollyannish, we do face significant near-term challenges such as terrorism and worker retraining and longer run demographic ones but net net, I just can't buy into a doom-and-gloom scenario.
So why am I not a raging bull? The 50 year compound annual growth rate of the S&P 500 is about 8%. That's a good enough number for me...it targets SPX at about 1200 by year end. All the positive stuff I said above is just our permission to continue moving up the wall of worry.
Apparently, the market does NOT care about the deficit for NOW....
http://www.nytimes.com/2004/02/08/business/yourmoney/08big.html
http://www.nytimes.com/2004/02/08/business/yourmoney/08big.html