There have been a number of wild rides through bubbles in the last decade or so.  There was the dot-com bubble that closed out the 90’s and welcomed in the new millennium.  Then there was the financial bubble, the credit bubble, the housing bubble…

Arguably many of those are inter-related, and chances are, you were affected by at least one of them.

So where is the next bubble?

First, I’ve come to accept the fact that history will repeat itself.  We are all poor students of history, but deeper, no one can really understand all the forces at play to effectively stave off a repeat of a certain event.

With that, it’s realistic to assume there is another bubble brewing as we speak.

With all the government intervention in finances, and the U.S. Fed’s “as low as we can go” interest rate policy, I suspect the next bubble will be in interest rates.

If there is one thing that history tells us, and it seems those in power never seem to study enough, is that the Fed is notoriously late when it comes time to act on monetary policy.

Most recently, Fed Chairman Greenspan was slow to lower interest rates which kept borrowing at bay when borrowing was most needed.  To that tone, I suspect Fed Chairman Bernanke will be slow to raise interest rates in an effort to keep inflation at bay.

Since any sort of monetary policy is based on lagging economic data (by 3 months or so), it’s understandable why interest rate moves also suffer from the same lag.  Historically though, interest rate moves have been late to the game by as much as 8 and arguably 10 months.

In the end, I suspect Bernanke will delay raising interest rates until late next year, and he’ll be forced to raise them to levels he’d not anticipated to keep the wraps on inflation.

So what makes this the Mother Of All Bubbles?

In one word, China.

Unlike the past, the Chinese are taking a great interest in our monetary policy, primarily because they own so much of our debt and currency.  To say the Chinese aren’t really happy with how things are going would be an understatement.

The Fed wants to keep rates low for fears that increasing rates will hamper an economic recovery.  But the Chinese have more leverage in our debt than they do in our unemployment rate.  They’re really looking out for their own financial interests, and who can blame them.

The Chinese are worried that the current U.S. policy is creating insurmountable risks to the recovery of the global economy, and they’re worried we’ll bring them down with us.

Any freshman in a college history course knows that the Chinese will do just about anything to keep their economic freight train steaming down the tracks, and they’re not real happy about the prospect of U.S. monetary derailing that train.

They own a lot of U.S. debt, and they’re not afraid to use that debt to influence policy in the States.  Higher interest rates will appease them as it will increase the value in their holdings.  It’s only a matter of time before Bernanke will have to oblige.

Higher interest rates is what they’re looking for, and higher rates they will get.

I suspect that interest rates will be late to go up, and will go higher and stay higher for longer than they need to.   All in the name of keeping the Chinese at bay.

Banking, Economics, Finance bernanke, China, interest rates, monitary policy

What a day.  Checking in on the markets around noon Central time, I was wondering if we’d seen the top of the bear market rally. There wasn’t much positive price action in the equities I’ve been watching, and gold (GLD: chart, web, Y!) wasn’t making any great shakes either.

Then Bernanke went on a shopping spree.

When I checked back in around the close, nearly everything I was watching not only reversed course, but went into overdrive.

The Fed committed to buying up to $300 billion in long-term Treasurys over the course of the next six months, as well as nearly double the purchasing power of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, totaling $1.25 trillion (remember, trillion is the new billion).

To top it all off, the Fed also doubled the amount of debt it committed to purchase from the inept mortgage lenders.

Effectively, this action is much akin to chopping interest rates even further; when you’ve hit bottom on the interest rates, the next best thing to do is buy the debt.  In a round about way, this increases the leverage on the banks side allowing them to borrow money at an even deeper discount.

Corner Office Comments

While all this sounds good on paper, and the market surely agrees, long term I’m not convinced this move was well thought out.  What is the Fed going to do with all this debt in the long term?  There was no exit strategy revealed.

Further more, anyone holding long term debt when inflation kicks in is going to get chewed up and spit out like something rotten.  The Fed included.  As the value of the dollar decreases, as readers of this blog remember I’m laying a significant amount of chips on some massive inflation, it’s going to take more of those dollars to service the debt the Fed is absorbing.  The fact that gold and petroleum products rallied on the Fed statement seems to reinforce that position.

This move seems to spread much of the financial strain in localized sectors of the economy, more broadly the financial sector, further out over the entire economy.  No longer are nearly worthless mortgage backed securities held by Fannie or Freddie, they’re held by the entire populous of the country (you and me).

From my standpoint Bernanke is throwing up his arms and wiping bad assets of public companies balance sheets, letting them start over, and forcing you and I to eat the bad tasting financial slop.  Things will look rosy for a while, until inflation starts creeping into play and the government will need to print even more money to service the debt.

Any further upside to this rally should be used to capitalize on gains and readjust into a hedge against inflation, in my opinion.

Economics, Finance bernanke, Economics, Fed, Inflation, treasury

Big Ben opened his big mouth again today, and it seems his outlook on the economy is getting a bit more bearish each time his voice hits the airwaves.

Testifying today at the Senate Banking Committee, he said he now expects “sluggish growth” in the economy but predicted a “somewhat stronger pace” later in the year. He went on to attribute his stronger pace forecast to rate cuts and fiscal stimulus.

He threw in the caveat that housing and labor markets could deteriorate more than anticipated, emphasizing that “downside risks to growth remain.”

It seems that Bernanke is drawing criticism from Washington from both Republicans and Democrats, arguing that the recent efforts to help fend off a recession were too late or insufficient.

“When you see something coming, don’t put it off,” Republican Sen. Jim Bunning of Kentucky told Mr. Bernanke. “Take action immediately. This housing market has been coming to us for a year, year and a half, and we didn’t react properly to it.”

This just reinforces the “we must do something” mentality of those in Washington… This mentality could relieve Bernanke of his position after his first term if things don’t start to turn up.

The Dow dropped 175 points after Bernanke quit talking… go figure.

I found the following video clip interesting. The buzz on the street has all but locked in yet another rate cut, and it appears that Bernanke is starting to accept the reality and the economic effects of a bleeding housing market and a troublesome credit problem are finally starting to rear their ugly head.

Economics, Finance, Market Trends bernanke, Economics, FED policy, video