The one bubble I see for sure: The Money Supply Bubble

Are we in an "everything bubble"?  That is, are the recent huge rallies in gold, stocks, and most other asset classes in the world mostly mostly attributable to the type of blow-off top action you get when bubbles start to pop?

I don’t know how many bubbles we’re living in right now, or even if we’ve even entered truly bubblicious territory or if we’re just on the way to bubble creating everywhere.  I do know this – the Fed/Treasury/White House/Congress have created a bubble in the money supply in this country.  Here, look what the Fed/Treasury/White House/Congress are doing to the money supply:

How much of the action in the markets are simply a function of this explosion in the money supply causing bubbles? gold's hitting new highs like every other minute.  Oil's almost tripled since it crashed to $30 a barrel.  Copper, silver and a lot of other commodities are higher than they've been in a long time. The stock markets are up 50% across the board since they crashed last year. Housing's still dropping, but it's not exactly in the free fall it was in 2007 and 2008.

Even scarier – if the artificially low 2-3% Fed Funds rates and no-doc jumbo subprime macchiato loans from the last ten years caused the great housing bubble, and if the artificially low 2-3% Fed Funds rates caused the great dot com bubble….aren’t those bubbles going to look like tiny air pockets when we get done with whatever bubbles are caused by the current 0% Fed Funds rates, $8,000 welfare checks for home buyers, FHA loans, trillion dollar TARP bailout cash infusions, $12 trillion in lending and corporate debt guarantees and all the other crap that’s not even being measured in that terrifying money supply bubble chart I posted above.

The dollar's down 20% plus from where it was last year...when everything changed and the Fed/Treasury/White House/Congress decided that we had to avoid asset depreciation at any cost to the responsible saver.  Not sure why I should be happy about that…remember how everybody told us in 2007 that a weak dollar would be good for the exporters and perhaps therefore the country’s economy? Back before we crashed that is.

We’ll hear the Fed/Treasury/White House/Congress explain their trashing of our savings and earnings by saying that they’re trying to stave off “deflation”. Don’t believe ‘em. It's important to remember the distinction between depreciation and deflation.  Depreciation is what happens to your assets when they lose value.  Deflation is what happens to the price of stuff you buy at the grocery store and at the movie theater when they get cheaper.  Have you seen that happen ever in your lifetime?  Have you seen the price of anything at your grocery or at the movie theater get cheaper in the last year or two?  I didn't think so.  We were experiencing a major asset depreciation cycle before the Fed/Treasury/White House/Congress decided they needed to sacrifice the value of everybody's savings and salaries by printing/borrowing and otherwise flooding our economy with worthless dollars that haven't been earned by anybody.

Put another way – no matter what happens to housing’s prices or the stock markets, do you really think the 99 cent store’s going to have more items for sale at 99 cents five years from today than it does today? I don’t. The DJIA might be at 6000 in five years, housing might be down another 10-20% across the country…but I don’t think the shoppers at the 99 cent store will experience much “deflation” in the next five years.

And I do think we’ll see a lot of strange asset appreciation turning into horrific and painful bubbles in the next five years…assuming the stock market is actually a part of that bubble – let’s picture the DJIA bubbling up to new highs and hitting 15,000….what’s the end game of that? Another bubble popping? More pain from trillions of misallocated capital.

Likewise I might ask as a parting shot here, what’s the endgame of the $8,000 welfare check, er housing credit for people rich enough to buy new homes? What’s the end game of the nationalizing the country’s mortgage giants, Fannie Mae and Freddie Mac? What’s the endgame of all these policies aimed at redistributing enough wealth into real estate so that the people who currently own real estate don’t lose their butts even though they were supposedly risking their own and their banker’s money on that real estate?

These bubbles, here now or here tomorrow, will eventually pop and we’ll all be worse off from them.

Best way to protect yourself? Bet on higher rates, as all this bubble making is sure to create demand for higher returns. When I used to run money, I’d sometimes buy calls on the TNX, which mimics the yield on the 10 year. Careful though, there’s not a lot of volume and the spreads are wide on those instruments. TIPS aren’t a bad bet either. I’d remain careful about gold though, as everybody I know remains bullish on that commodity and remains convinced its safe haven, despite the possibility of asset depreciation hitting, yes, even gold.

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