History's Biggest Bubble - Has it Finally Burst?

Greenspan's long-ago warning of 'irrational exuberance' still rings true. No one listened then, and No one is listening now?

We recently marked the sixth anniversary of the peak of the great millennial stock bull market and as far as the DOW Jones is concerned, we came within a hairs breath of making a new all time high. What were you doing when the lights began to dim? Were you a bull or a bear? What about today? Are you inoculated against the new alleged sure things? Or perhaps you believe in the permanent hegemony of the dollar in the world's currency markets? Or In the inevitability of perennial rising home prices? Or of perennially low interest rates? Answer true or false: The chairman of the Federal Reserve Board is clairvoyant.

From the March 2000 top to the October 2002 trough, the U.S. stock market gave up more than half of its quoted value, some $9.2 trillion. Six years ago Cisco Systems was the world's biggest company by market capitalization. Its line of business, the computer networking business, was universally heralded as the industry of the future. Owners of Cisco still devoutly hope it is. Never the less they have lost 75 percent of their investment.

Americans hate to lose, especially when it comes to money, and they've demanded an accounting of the misdeeds of the bubble era. A certain number of former chief executives, like Bernard Ebbers of WorldCom, and Martha Stewart had to answer charges and finally Enron's Skilling and Lay have finally been convicted.

Congress, in 2002, overhauled and stiffened the nation's securities laws. (They may be killing the Goose that lays the Golden Eggs by throwing the baby out with the bath water) But the chairman, governors and staff of the Federal Reserve have yet to be called to account. Of course politicians DO NOT have to live by the same Laws that they create for everyone else. If they did every One of them would be serving Life sentences. Booms and busts are recurrent in national economies throughout history. In not every episode was there a culpable central bank. But in virtually every case, there was a Debasing of the Currency.

The unbearable sight of a neighbor getting rich in the stock market in the late 1990s made millions of Americans bipolar. Buying wholesale and Shopping at Wal-Mart, they would pay any price except full retail. Investing in the stock market, however, they would pay nothing but premium over retail.

By the late 1990s, stocks had lost any connection to the value of the businesses in which they represented partial ownership. Picture an artful consumer settling into a discounted hotel room for the night. Now try to imagine this savvy individual formulating a calculated financial decision to make a meal of the $10 cashews and the $6 candy bars on sale in the hotels mini-bar. That was Wall Street a half decade ago and, to a somewhat larger degree, is it the Wall Streets today of the world today - and Main Street, too. The Federal Reserve did not stand idly by after the bubble burst. It radically reduced the FED Funds Rate, pushing it from 6.5 percent in May 2000 to 1 percent by June 2003.

Alan Greenspan, the chairman of the Fed, had worried about a stock market bubble as early as 1995 and had warned against "irrational exuberance" in 1996, and batted around the possibility that there might indeed be a stock-market bubble in discussions with his Federal Reserve colleagues as late as 1999.

But he was not the man to stick a pin in the bubble. Indeed, he himself became a vociferous booster of the "New Economy." In a speech he gave only four days before the Nasdaq touched its high, he sounded as if he were working for Wall Street, cheering that "the capital spending boom is still going strong."

Should the boom turn to bust, the chairman had testified before Congress less than a year before, the Fed would "mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion." Creating the Greenspan PUT.

In so many words, Greenspan promised that the Fed would make money cheaper and more plentiful than it would otherwise be. He would override the market's judgment with his own.

Nobody in earshot quoted the words of the German central banker Hjalmar Schacht, who protested in 1927: "Don't give me a low rate. Give me a true rate, and then I shall know how to put my house in order."Someone should have been listening then and someone better be listening NOW.

Interest rates are the traffic lights of a market economy. To investors, they signal when and where to go and when to stop. To individuals they dictate present vs. future consumption. (savings). With what savers can earn in interest today is there any wonder why our national savings rate is less than 1%. To entrepreneurs they signal which investments are not worthwhile making. Under the Fed's bubble recovery program, every interest-rate signal light turned green. Go forth and Speculate is the FED's message. With no lights flashing red or even amber, investors sped through the financial intersections. They paid more for houses, office buildings and junk bonds than they would have if interest rates were not hugging 40-year lows.

The proliferation of dollars helped to lift the stock market out of its doldrums - though the doldrums of 2002 were singularly shallow in comparison to earlier bear market lows. Bargains were scarce on the ground (by March 2000, stocks were uniquely overvalued; never before had a dollar of corporate earnings been so costly to buy).

At the checkout counter, inflation was well-nigh invisible. On Wall Street, however, it was - and still is - on the rise reaching for Big trouble in the near future.

To hear Greenspan tell it then and Berenanke today, damage control was as simple as cutting interest rates. He passed lightly over the possible consequences of the rates he cut. The list so far includes a booming bubble-like housing market which has just recently topped out and is about to wreck havoc by it's crashing on the Stock and Bond markets as well as on the economy. What could be worse than overheated debt and stock markets that spans the globe and a steady depreciation in the foreign exchange value of the dollar that could bring the world's financial system crashing down?

Consuming much more than it produces, the United States emits hundreds of billions of greenbacks into the world's payment stream every year - about $600 billion in 2004 and $750 billion in 2005 and $800 + Billion in 2006. The recipients of these dollars have thus far willingly invested them in American assets because the price was right. Ultra-low interest rates not only serve to inflate the value of bonds, stocks and real estate, they also entice investors in those assets to employ the elixir called "leverage." Leverage means debt. Borrowing at 2.5 percent, a speculator can invest at 3 percent and still make a handsome living - if he or she can be sure that interest rates would be only raised very gradually in measured increments. The Fed has been happy to oblige. Forswearing the element of surprise in its policy actions, it has told the market exactly what it proposes to do. Paying close attention, professional investors, including thousands of hedge funds, have borrowed fearlessly. A little fear would help to improve the quality of financial stewardship.

"A stock well bought is half sold," said the old Wall Street adage. What that means is that success in investing depends on one's entry price.

As Congress debates an overhaul of our immigration and border security, every thing that they are doing reminds me of Nero fiddling while Rome burns.

Greenspan in his latest speeches is once again warning about "irrational exuberance"! The words are different but the meaning is still clear. Now Bernanke is also doing almost nothing about it except continuing Greenspan's policies of warning everyone, buy his succession of ¼ point interest rates increases while at the same time continuing to fuel the fires by constant increases in the money supply. He is trying to engineer a soft landing by hoping that everyone will see the light and heed the signs and curtail their Irrational Exuberance". But the bubbles keep on rising and they will end like every bubble in the past has ended. Sooner or later interest rates will rise high enough to create a liquidity crises and the Bubbles will burst and the markets will crash as the people finally realize that The Emperor Is Not Wearing Any Clothes.

HISTORY REPEATS

The 1920's Bubble came to an end when interest rates rose high enough to precipitate a liquidity crises and even though Hoover arranged to lower interest rates from 6.5% down to 1% in less than a year, there was no reversing the burst bubble (you can't unscramble an egg or repair a Burst bubble). But unlike 1919 when Hoover was only Secretary of Commerce he was now the President and where President Harding refused to go along with his hair brained socialist schemes to fight the depression and did nothing. " the Banks got themselves into this mess so let them get themselves out" was Harding's fervent reply and so the depression lasted less than two years even though the 1919 drop was much worse than the 1929 drop. But alas in 1929 Hoover was now the president and he was able to implement all his socialist ideas to fight the depression. Not only did he get the recently created FED to lower interest rates but he started Keynesian make work projects such as the Hoover Dam and the TVA and in reality was the father of the NEW DEAL. Being in a depression the Republicans were naturally swept out of .office and FDR and the Democrats took over in 1933 and promptly expanded on Hoover's actions into the massive socialist NEW DEAL which rather than end the depression actually extended it for another 14 more years.

By NOV. 2006 we should be well into recession and the Republican will lose at least one of the houses of Congress if not both and by 2008 the USA and the World will on the bring of depression and Hillary will become the FDR of the 21st Century. Being a good socialist like FDR before her, and with full control of both houses of congress she will promptly reverse Bush's Tax Cuts (let them expire) as well as institute other new deal type legislation. If that won't enough, a 21st century Smooth Holley Bill if not already passed by the fools in congress, would soon be. Put it all together and this coming Depression will take over from the 1930's as being the worst depression in American history. GOD I HOPE I'M WRONG

PROTECTING ONESELF

As far as the stock Market(S) are concerned, you should all be in cash by now and maybe even a little short. If not, the next few days or week at most may be your last good chance to SELL. I have been warning you all since October 2005 that we were forming a massive world wide stock and bond market top that was due to break sometime between March and May 2006. When living on borrowed time for years it's difficult to pick the exact top. Remember "Sell in May and Go Away".

Although I don't think that this time around the Government will NOT confiscate all our Gold, there is no logical reason not to protect oneself against the limitless stupidity of Government by "Buying Gold Coins for CASH" in conjunction with your accumulation of Gold and Silver Stocks and Bullion.

GOLD

Thus far the rise in Gold has been an almost perfect Elliott Wave I, which included an extended fifth wave. What that means to is "Extended 5th Waves are always doubly retraced" In plain English that means the highs will always be retested, either as part of a longer sides ways correction or as Wave I (3) of the next advance to new highs. The Maximum downside target of this normal Wave (2) correction, which will mark the end of Wave (2) and the Launch of Wave (3) is $578 to $610.

Your finally are in the CORRECTION that you have all be hoping for, so what are you waiting for: Continue to ACCUMULATE on weakness. We are exactly on the track that I have been writing about for the last three years.

Let me remind you of one very important fact that I have continued to emphasize and that is that the Gold Stocks always lead Bullion, both on the way up as well as on the way down. This time is no exception. The Stocks topped out before Bullion did and they will bottom out before bullion does as well.

GOOD LUCK AND GOD BLESS

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
[email protected]
561-840-9767

May 30, 2006

DISCLAIMER
The above is my personal opinion, and in no way be deemed investment advice to buy or sell anything. It is submitted purely for informational purposes, based upon my understanding of the markets.