Bubble Everywhere

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The burst of the equity bubble produced the bond bubble and the housing
bubble. As investors fleed the stock market, funds poured into bonds,
bidding up prices and lowering effective long-term interest rates.  As
the Fed lowered Fed Funds rate targets, low mortgage payments pushed up
housing prices, producing a housing bubble.  The burst of the bond
bubble will threaten the housing bubble, the bursting of which will
exacerbate aggregate demand in construction, for labor, for home
appliances and supplies, which will in turn affect corporate earning
which will torpedo the current "recovery".  The collapse of the Japanese
bond market will also force the Japanese to sell US Treasuries, adding
to the problem.  The smart money is already borrowing short term,
through the repo market and its related instruments, to invest in
10-year treasuries. Another debt bubble is building.

Bubbles are now pathological.  Fund managers are all forced to respond
to quarterly results.  Herd behavior is a given. The aim is to beat the
market, not to invest in the market. S&P Fixed Income Committee has just
recommended a cut back of 5% on 10-year bonds in fixed income
portfolios, in response to falling bond prices. The 10-year bond is now
a terminal instrument in that the rate advantage in the currenct
deflationary period is not expected to compensate to the price fall due
to eventual inflation over its 10-year life span.  Thus 10-year bonds
are now a short-term trading instrument, not a long-term investment
instrument.  In fact, if you do not follow the market daily, you have no
business being in the market.  So long to the long term investor.  When
all investments are short-term, it is a trader's market, turning the
economy into a horse race.  The difference is that in a horse race, the
betting odds on a horse do not affect its performance. That is not true
in an economy driven by equity and credit prices.  The whole market can
bet on the wrong sector and make it a winner in the next quarter, but it
may finish last in the race.

Wealth preservation is now a losing game.  Asset is becoming a
liability.  Income is all.


Henry C.K. Liu