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Who Is Going to Prick The Global Asset Bubble?

By: Steve Johnson

11/17/2009 - 59 Comments

A few weeks ago I sold my 401k market positions and parked my money in bonds to avoid the coming market meltdown.

Since then, Fed Chairman Ben Bernanke said he is going to hold interest rates at zero for at least the next six months, and the G20 leaders said they were going to keep the easy money coming until the economy shows more signs of life.

Those policy decisions have resulted in a two week increase in global stocks and commodity prices – with gold making new records almost daily.

There is clearly a global asset bubble forming from the trillions that has been poured into the global markets. The question is who is going to prick the bubble?  The longer the bubble is allowed to grow the larger the correction is likely to be.

Yesterday Obama visited China to discuss the China-US economic partnership.  China's Liu Mingkang, the chairman of the China Banking Regulatory Commission, had this to say.

"The continuous depreciation in the dollar, and the US government's indication that, in order to resume growth and maintain public confidence, it basically won't raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation."

He is blaming the U.S. for fuelling a destabilizing global bubble, while the US has accused China of fueling the bubble by continuing to maintain its dollar peg.  Maintaining the dollar peg causes China to flood the market with its currency pushing up global stock markets well beyond their realistic value.

Neither China nor the US government has been willing to allow the deflationary process of the global recession to take place.  Instead they have chosen to counter the deflation with massive currency inflation. 

It’s like blowing air into a balloon with a hole in it. For a while, it looks like the balloon is being re-inflated, but as the hole gets bigger more air is leaking out and eventually the balloon will deflate no matter how much air is blown into it. 

The question that remands is who is going to stop the bubble that is clearly forming before the world ends up with another global meltdown? 

The US could start rating interest rates.

China could let is currency rise against the dollar.

Japan could stop printing money and buying US bonds.

Europe could begin raising interest rates and stop buying US bonds.

At this point, only Australia has started raising interest rates because they realize that an asset bubble is forming and the lower they have rates the harder they are going to be hit when it busts.

I would like to remain invested in Gold through this period of time as the world continues to try and support the dollar, while the Fed continues to create massive currency inflation. But it is very risky because I cannot predict when someone will prick the global asset bubble. 

When they do investors will flee stocks and pill into bonds, which will support the dollar and drop the price of Gold just like it did in the 2008 crash. After the crash, gold is likely to continue to increase as it is impossible for central banks to remove the money that they have added.

If the bubble continues to grow for the next six months, gold prices are will surely continue to climb. In the short run gold is a risky investment, but in the long run it is sure to be a winner.

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