Is
the Great Worldwide Bubble still expanding?
Bill Bonner
The
Daily Reckoning UK
12 Jun, 2007
Is the Great Worldwide Bubble
still expanding?
We checked our usual sources
this morning.
And yes... after a few
days of uncertainty last week when the Dow fell 400 points...
the leak was quickly repaired and the bubble is still expanding.
On Friday, just before the end of the session, the Dow pumped
up 157.66 points or 1.19 percent to 13,424.39. Gold fell to $650.
The dollar rose.
It is now the 6th month of
the 25th year of this historic expansion... and all is
well.
Meanwhile, we got word, via
Bloomberg, that there are still plenty of people eager to get
into the partying before someone calls the cops. Sales of CDOs
(collateralised debt obligations) hit a record in the first quarter
of this year - at $251 billion for the three months they're running
at more than $1 trillion per annum. Bloomberg reports that:
"sales of CDOs pooling
asset-backed securities increased 21 percent from the previous
quarter. The derivatives are typically backed mainly by subprime
mortgage bonds, or securities created from loans to homeowners
with poor or limited credit histories."
And yesterday, an old friend
brought up another old friend,
"You remember Catherine?"
he asked. "You know, she collects photographs. I mean, photographs
from well-known people. Well, guess what? The market for photographs
has gone crazy. Actually, all the collectibles have gone crazy.
There's just so much money around, it's stirring everything up.
She had a few photos that she'd paid $4,000 for, a few years
ago. They're going on the auction block at Christie's this week.
Guess what the guide price is? A half a million. It's really
unbelievable."
See how easy it is to get rich,
dear reader? Just buy something. Then, you wait a respectable
interval, and then you sell it to someone. It's so easy an idiot
could do it. In fact, many of the people who are doing
it are idiots. They're dumb enough to believe that asset prices
always go up. And they're getting rich because they don't know
any better. Oh, to be an idiot...
But what kind of wealth is
that you get without working or saving? 'The best kind' say most
people. But to us, it seems more like a case of false pretenses.
It's like a man who marries a rich widow... and then discovers
that she's as penniless as he is. Maybe it will work out; but,
maybe it won't.
Here at the Daily Reckoning
headquarters, we confess that we're too rich to steal... too
dumb to lie... and too humble to profit from a credit
bubble. To get rich in today's wacky markets, you have to believe
wacky things.
We don't mind believing wacky
things, but the problem is the wacky things you need to believe
today scratch uncomfortably against our sense of humility.
Today, you have to believe
not only that over-priced financial assets are going up, but
that you alone know which ones will go up most. And you also
have to believe that you know better than Mr. Market. Because,
when you buy at the market price, you're wagering that Mr. Market
has made a mistake and missed something. And then, you have to
believe that when he gets around to noticing what he's missed,
the asset you just bought will have gone up in price.
The staggering arrogance of
it is too much for us. We don't buy things because we think Mr.
Market has bungled.
We only buy things we think
are of real value. But right now, where can you find a real value?
In the stock market? In the property market?
How about Paraguay? Maybe.
That's where the Bush clan has bought a ranch. We think perhaps
they were looking ahead to the time when they'd have to flee
an angry American mob. They've probably made a deal with the
Paraguayan government, letting them skulk down there after people
get wise to what they are up to here. Or, maybe they were just
looking at values. According to International Living's reports
[at Internationalliving.com] - you can't get more for your money
anywhere than in Paraguay.
Who wants to live in Paraguay,
you ask? We don't know, but we'll check it out. You see, we just
learned that we're being exiled from France, so we too will soon
need a place to hide out. We'll give you a report when we get
down there.
But let us return to the world's
first Worldwide Bubble.
We notice one other thing -
in addition to gold - that did not bounce up on Friday. That
was the 10-year US Treasury note. It's going down. Which means
the price of credit is going up - despite the glorious gush of
cash and credit from central banks, CDO investors and others.
Now, if the cost of debt goes
up enough, of course, the credit bubble will blow up.
According to classical economic
theory, an expanding credit bubble takes more and more credit
to expand and keep output increasing. That is what we have seen
for the last few years - higher debt/GDP. Economists now warn
that the housing slump may have a longer-lasting effect on GDP
growth than previously thought and (according to the most recent
reading), actual GDP growth has fallen below the rate of population
growth. As a credit bubble goes on, it becomes less effective
at producing wealth... and more effective at producing
what was most lacking in the first place - humility.
That means that if this book
keeps at this rate, Americans will eventually be sneaking across
the Rio Grande, to look for work.
Maybe the Mexicans will build
that wall before us.
This article is from The Daily Reckoning
[UK]. The Daily Reckoning digs deeper than your newspaper ever
dares, to bring you the real truth about the stock market...
the gold price... oil supply... property trends...
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Regards,
Bill Bonner
email: DR@dailyreckoning.com
website: The
Daily Reckoning
Bill Bonner
is the founder and editor of The Daily Reckoning.
Bill's book,
Mobs,
Messiahs and Markets: Surviving the Public Spectacle in Finance and
Politics, is a must-read.
He is also the
author, with Addison Wiggin, of The Wall Street Journal best seller
Financial
Reckoning Day:
Surviving the Soft Depression of the 21st Century (John Wiley
& Sons).
In Bonner and
Wiggin's follow-up book, Empire
of Debt:
The Rise of an Epic Financial Crisis, they wield their sardonic
brand of humor to expose the nation for what it really is - an
empire built on delusions.
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