subject: Gold Today: Surreal Policymakers Are Blowing Serial Bubbles [print this page] The above is more a sarcastic observation than a title for this edition. A play on words that is not inaccurate. Also it is descriptive of a mania in policymaking whereby central bankers in their desperation to prove their theories have exaggerated speculation in the All-One-Market (AOM).
In November we noted the ability of a methodical rise to soar to compelling conditions, become unstable and then fail. If it becomes big enough the buying frenzy drives our proprietary Momentum Peak Forecaster (PMF) to a critical high. Anything above 1.21 has been followed by a major high and slump.
It does not matter what the focus of speculation is. Examples since 1970 include credit spreads in 1998 that led to the LTCM disaster and housing in 2006 that led to the 2008 financial collapse. In early December the "Forecaster" reached 1.25, which prompted our first alert. The implications were reviewed two weeks later when it had reached 1.27, which compares to 1.31 before the 1987 Crash.
This is plotted weekly and the number is now at 1.284 and is running out of momentum. Let's call it 1.28 and conclude that the formal signal has been accomplished. In which case the speculative frenzy in markets and policymaking is about to fail. Typically, the lead from alert to failure has been within one to two months, which is a rather wide time window.
Another factor that I think blows a cold wind on asset inflation is the sharp reduction in the 52-Week Global U.S. Dollar Liquidity Growth Rate. The annual growth rate has plunged from a year over year 48% rate of growth in January 2009 to just 6.19% now. Note that this rate of liquidity growth in the worlds reserve currency is the lowest it has been since the spring and summer of 2001. It hovered mostly over 10% annual growth rate from about the time we started our IDW until our IDW plunged drastically following Lehman Brothers. Thats when Bernanke put the pedal to the metal and drove this measure of liquidity to an unheard of 48% annual growth. Note that these low points in the past were the start of major crises, starting with the Asian Crisis in 1998.
In 2001 and 2002, there was a real fear of deflation on the part of the Fed as Japans problems continued and the U.S. showed signs of following in their footsteps as this measure of liquidity growth hit zero percentage growth. That prompted Greenspan to create the housing mal investment (bubble), which prompted him to shoot liquidity growth up to over 20%. What a disaster. We are now coming down on the contraction side of the biggest bubble blown to date, which I call the Treasury bubble.
If you take liquidity out of a system that is addicted to artificial monetary stimulus, the result is not pretty. I believe very firmly that the stage is being set for a major catastrophe in the equity and commodity markets. Yes, I know Chen Lin thinks we will see a continued expansion in equities and commodities this year and next. I have to respect him because of his excellent track record. But Chen, being the humble person he is, will be the first to suggest he could have it wrong. Im not saying he does, but technically, it seems to me there is ample reason to think the end of the post-Lehman Brothers bubble may be nearing an exhaustion when additional stimulus not only fails to work but could actually throw the economic machine into reverse, especially if interest rates begin to rise dramatically.
