Bubbles

from the November 3 FOMC Minutes:

"Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks."


from the book Meltdown, p8, by Thomas E. Woods, Jr.:

"The Fed's policy of intervening in the economy to push interest rates lower than the market would have set them was the single greatest contributor to the crisis that continues to unfold before us. Making cheap credit available for the asking does encourage excessive leverage, speculation, and indebtedness."

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As one can see from the above two quotes, there is a considerable difference in philosophies regarding the probability of prolonged low interest rates in creating asset bubbles. The top quote is from the November 3 Federal Open Market Committee Minutes, while the quote below it from Tom Woods Jr. and seems to offer a concise view of the Austrian philosophy on the low interest rate matter.

The issue of whether the ultra-low interest rate environment that has been put in place has fomented asset bubbles is a critical one. For background on this matter, the November 30 BusinessWeek had a story titled "Is the Fed Creating New Bubbles?" and can be found at this link:

http://www.businessweek.com/magazine/content/09_48/b4157022781639.htm

My opinion on the matter is that there are currently multiple bubbles that have formed across various asset classes. They are of various sizes and "vintages." Asset bubbles that burst can of course cause tremendous economic damage. Perhaps the best example of this is "bursting" of the housing bubble.

Some bubbles are harder to spot than others. Bubbles, almost by definition, include irrational behavior, and therefore can be hard to predict both in their formation as well as their ultimate size. There are many factors that can come into play in order to cause bubbles.

I have addressed my thoughts as to whether Gold is in a bubble in a November 20 post. Another question, that is critical to both investors and the economy, is whether U.S. Treasury securities, especially the 10 Year, is in a bubble. I believe the answer to this is "yes." The reasoning for my opinion is rather lengthy and complex; however, the previous post (from November 30) represents some of my thought on the issue.


SPX at 1112.28 as this post is written