Bubbles, Bubbles Everywhere

The title today’s post comes from John Mauldin’s recent internet newsletter Thoughts From the Frontlines. As serious as the topic of his article is, he supplies some typical Mauldin entertainment. Here is an example:

Every year, the Darwin Awards are given out to honor fools who kill themselves accidentally and remove themselves from the human gene pool. The 2009 Award went to two bank robbers. The robbers figured they would use dynamite to get into a bank. They packed large quantities of dynamite by the ATM machine at a bank in Dinant, Belgium. Unhappy with merely putting dynamite in the ATM, they pumped lots of gas through the letterbox to make the explosion bigger. And then they detonated the explosives. Unfortunately for them, they were standing right next to the bank. The entire bank was blown to pieces. When police arrived, they found one robber with severe injuries. They took him to the hospital, but he died quickly. After they searched through the rubble, they found his accomplice. It reminds you a bit of the immortal line from the film The Italian Job where robbers led by Sir Michael Caine, after totally demolishing a van in a spectacular explosion, shouted at them, “You’re only supposed to blow the bloody doors off!”

Central banks are trying to make stock prices and house prices go up, but much like the winners of the 2009 Darwin Awards, they will likely get a lot more bang for their buck than they bargained for. All Code Red tools are intended to generate spillovers to other financial markets. For example, quantitative easing (QE) and large-scale asset purchases (LSAPs) are meant to boost stock prices and weaken the dollar, lower bonds yields, and chase investors into higher-risk assets. Central bankers hope they can find the right amount of dynamite to blow open the bank doors, but it is highly unlikely that they’ll be able to find just the right amount of money printing, interest rate manipulation, and currency debasement to not damage anything but the doors. We’ll likely see more booms and busts in all sorts of markets because of the Code Red policies of central banks, just as we have in the past. They don’t seem to learn the right lessons.

Among the central bankers Mauldin refers to includes the one run by Ben Bernake whose overlords sit on Capitol Hill.

Mauldin goes on to describe how the currrent financial situation is beginning to product many more bubbles. Among his list of bubbles include stock market and agricultural real estate. Following this, he present a brief history of bubbles and crashes and then explains their modus operandi.

Of course, I like the entertainment part of Mauldin’s financial work. His latest book is entitled Code Red: How to Protect Your Savings from the Coming Crisis.

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