Saturday, April 10, 2010

Bernanke the Bubble Slayer.

For those of you who were concerned that the federal reserve's free money policy would create our third consecutive massive asset bubble, worry no more. Ben Bernanke is on the case. That's right, the man who, at the peak of the greatest housing bubble in history, said that home prices were healthy and sustainable, is on the hunt for any signs of irrational exuberance. Hopefully, the signs of the next bubble will be more obvious than a TV show called "Flip this house", more clear cut than no documentation, negatively amortizing, no money down home mortgages. The highest household debt levels in history will not be enough for Ben's discerning eagle eye, nor market prices that trend in one direction for months or years at a time without any significant pullback. See, these are all signs from our previous disastrous bubbles, and Ben Bernanke couldn't see them. So, let's see if we can find any evidence that our current free money policy might be already introducing distortions into asset pricing, on the outside chance that the fed's economic wizards may have missed something.

Hmmm. I notice that Apple computer stock is trading at an all time high, much higher than at the peak of the housing bubble, when liquidity from housing finance was sloshing around in the economy. Bernanke says that the economy is weak, the job market is in bad shape, consumers are strapped; we need exceptionally low interest rates for an extended period of time. Yet somehow, this company that makes expensive discretionary consumer gadgets like cell phones and mp3 players is printing money. There seems to be a bit of a dichotomy between Ben's perception of the economy and Apple's stock price, but I'm sure there's no bubble involved here. After all, history is replete with examples of $220 billion dollar companies that warranted a high growth multiple valuation.

What's that, you say lots of other consumer stocks are soaring too? Companies like Staples, Target, TJX, Whirlpool, Nordstrom, Coach, Amazon, and many others, soaring near or beyond all time highs? These aren't defensive stocks, they're consumer cyclicals and they say the economy is booming. In fact, the RTH retail ETF is very near its all time high set at the peak of the housing bubble. How can that be? The consumer is over-leveraged, tapped out, jobless, but these stocks are soaring? Well, Ben says he doesn't see any assets classes that are significantly mispriced, so it's just an enigma that will be solved at a later date.

What about commodities, any bubblish signs there? Let's see oil in the mid 80's, up 150% from the lows, at a level never seen before the housing bubble. Copper near the highs of the decade (near the housing bubble levels, imagine that and we're not even doing much construction now), up nearly 200% from the lows. Iron ore contract price hikes of 100% recently. Precious metals near all time highs. And what about soaring farmland prices, noted by (our only hawkish) Fed president Thomas Hoenig recently? Agricultural commodities have been restrained so far, but someone is betting big on a change there too. Obviously none of that contraindicates zero interest rates for an extended period from the world's central banker.

How are other economies reacting to a veritable flood of the world's reserve currency? China and India are both booming; they've had to reign in liquidity to cool things down. Australia is overheating, raising interest rates to slow down the wild west mining boom. Indonesia's central bank sees a stock market bubble. British producer prices were up 10% year over year in March. Global financial markets, paper assets, are on a 45 degree slope to heaven as dollars drive that old familiar "wealth effect" paradigm. Ben likes paper asset inflation, it's good for what ails us (he learned that from the maestro). Until it bursts, but that's a problem for another day.

All in all, we're very fortunate to have Ben the Bubble Slayer on the job. We can all rest easy that Ben doesn't see any evidence of bubbles yet. And when he does, you'll be the first to know, after Lloyd Blankfein and Jamie Dimon, of course. They're too big to fail.

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