Market Overview

Screwing The Investor: Biggest Bubble Of Them All


In the last fifteen years, the United States has seen bubbles inflate and burst more often than anytime in history. There has always been a boom and bust cycle, yet in the last decade and a half this has happened once ever few years. The average investor should be extremely worried about this because these cycles destroy more of their wealth than anything else in the world. The average investor will buy into a bubble near the top, then ride it down until they sell at the lows. During the financial crisis, many investors lost their retirement savings. The same thing happened to some extent during the tech boom in the late 1990's. So why are we seeing more dramatic bubbles in the last 15 years?

The simple answer is government intervention, primarily the Federal Reserve. While the Federal Reserve is not part of the government, they act as their hand.

Let's look at an example of a cycle. Take the seasons. There are four seasons, spring, summer, fall and winter. Now what if you took spring and manually kept it all year round? Things would be beautiful, life would flourish...for a while. Yet nutrients would be eliminated from the soil, depleted as new life thrived early on. In no time at all, without new nutrients being put into the soil through death in fall and winter, a catastrophic collapse would occur. Soon life would wither and die regardless of spring. The ecosystem would collapse.

Another example would be changing the cycle of life in the human race. To some extend this is already being done through medicine. If you take away the prospect of death in the human race, overcrowding would ensue. Within years, mass starvation would occur and the pollution to the earth would create even more hardships. This can already be seen with hundreds of millions hungry around the world and global warming taking hold.

The bottom line is simple. Cycles are part of life, whether in nature or in the markets. When you mess with them you will screw things up even more. The Federal Reserve tries to limit the severity of recessions by intervening with monetary policy. While in the short run it may and often does help, it never outweighs the long-term consequences.

The best example can be seen right after the technology bubble collapsed. The Federal Reserve dropped interest rates dramatically and encouraged home buying for all. While it may have kept that recession slightly less severe, that action created the real estate and financial crisis.

To deal with the financial crisis and the Great Recession, the Federal Reserve has now printed trillions of Dollars. The way they do this is by pumping money into treasuries and artificially keeping interest rates at 0%. This is known as "Quantitative Easing". In addition, the government has taken on trillions in debt to help alleviate the harshness of the recession.

These actions, even more drastic in nature will have unbelievable consequences down the line. The next bubble is in the bond market, less than 5 years away from collapse. While many average investors do not think the bond market has much heading on their lives, it does. This is tied to inflation and interest rates. In other words, the price you pay for food, energy and everything else you buy may be double in just five years.

Please note that each bubble collapsing, is harsher than the last. This is mainly because each time, the Federal Reserve and government take on more drastic measures to get us out of the mess. The more drastic the measure, the bigger the next bubble created by these measures will be.

Recessions stink, no one wants them but they are a way of life. If left to their own doings, recessions would generally be minor. The more you screw with the natural course of things, the more you screw yourself, the American people and the world.. I plead with the Federal Reserve and government to start hearing common sense and realize screwing future generations will only send them to hell and make the history books curse their names.

Related: SPDR S&P 500 ETF Trust (NYSEARCA:SPY), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ: QQQ).

Gareth Soloway
Chief Market Stategist

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Economics Markets Trading Ideas


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