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Walter Zimmerman: The Golden Age of the Speculative Bubble


Observations from Walter Zimmerman, United-ICAP

We have noted before that we have all been passing through a golden age of speculative financial bubbles. Since the year 2000 the history of the financial markets has been the history of a series of bubbles. By now we are all familiar with the sequence. First the speculative bubble inflates, then the bubble bursts, and then a financial panic ensues. From 2000 the internet bubble burst. From 2005 the real estate bubble burst. From 2007 the stock market bubble burst. From 2008 the commodity bubble burst. As we write this it would appear that the bond bubble and the gold bubble are now bursting. Never before in history has there been such an extended and frenetic sequence of speculative bubbles.

This observation naturally raises a few big questions. For example, where is all the money coming from? Why are traders and investors not picking up on the destructive effect these bubbles have on preserving and creating wealth? What is it about our financial system that lends it to such prolific speculative bubble creation? How did we get here? How can anyone maintain that the path that led us all here is the path of progress? And how does the financial system move beyond this destructive frenzy?

Many blame Alan Greenspan for initiating the bubble economy. There is an excellent book that details this case. It is “Greenspan’s Bubbles” by William A. Fleckstein. If one digs a bit deeper one finds that the very structure of the Federal Reserve is a co-conspirator in all this. There is an excellent book that delves into this aspect. It is “The Mystery of Banking” by Murray Rothbard. We would just like to make a few observations before introducing the largest bubble yet found by science.

We would first note that investment banks used to make money by actually investing in America. They would connect investment capital with companies that needed capital to grow. Now investment banks make their money by trading. In perhaps the most obvious case Goldman Sachs made 69% of their income during the most recent quarter from trading. While they may be the most extreme instance, among the so-called investment banks they are also the most envied.

Part of the problem may be that this country has been living beyond its means since the 1960’s. One result is that pension funds are under-funded by trillions of dollars. Governments on all levels are technically bankrupt. In the United States we have an entire generation of baby boomers that are about to retire but somehow forgot to save any money. Complicating their efforts is the fact that one in four Americans are underwater on their mortgage. Everywhere you look one sees a great need for large amounts of fast cash. Who these days has the patience and the luxury of time to actually invest? Everyone knows that trading is a faster path to riches. But how can everyone make money trading at the same time? This is the herding dynamic that creates speculative bubbles.

Now if one studies history one finds out that the Federal Reserve was formed to prevent speculative panics, to maintain the value of the dollar, to preserve the purchasing power of the consumer, and to responsibly manage the nations money supply. Has an organization ever strayed as far from accomplishing its goals as the Fed?

Big Speculative Bubbles: Art Imitating Nature?

“No form of Nature is inferior to Art; for the arts merely imitate natural forms.” Meditations. xi. 10. Marcus Aurelius

The fields of economics and finance as they are practiced today are clearly not sciences. And we would not be overly generous to call them art forms. In both the arts and modern day finance creativity is the key. In both the arts and finance things are being done today that have never been done before. Both fields lend themselves to excess, as in both fields big productions are popular. So if the field of modern day finance is an art, and if the output of this art form is the speculative bubble, we should not be surprised to find that bubbles are common in nature.

In one of the great ironies of our age of the speculative financial bubble, science has just found what could well be one of the largest  bubbles in Nature. And just as academic economists are clue-less as to what is behind the hectic sequence of speculative financial bubbles, cosmologists and astronomers are stumped by what could have possibly created the massive bubbles just discovered. See next page.

These newly discovered gamma-ray bubbles extend out roughly 50,000 light-years or about half the diameter of our Milky Way galaxy. And the bubbles are centered at the core of the Milky Way. Thankfully the bubbles are not centered over planet Earth. These are gamma-ray bubbles and gamma rays are the most energetic form of radiation by far. They were found based on observations by Fermi – an orbiting gamma ray detector.

At this early stage scientists can only speculate as to what could have possibly produced such enormous and energetic bubbles. Alan Greenspan may well be much older than he looks, but he is neither old enough nor powerful enough to have produced bubbles this big. It does seem rather safe to suppose that scientists will have these gigantic bubbles completely figured out well before economists realize that their own ill-conceived financial policies are behind the bountiful bubble creation that began over ten years ago in year 2000 – and as yet show no signs of subsiding.

Meanwhile we have new financial bubbles bursting in air. A financial fourth of July is upon us. Our technical analysis suggests the following:

  • DX Index ( US $ ) – a decisive break out above 79.600 targets parity with the Euro-fx currency
  • Interest Rates – a decisive break out above 2.970% in the interest rate on the ten year treasury note targets an eventual 5.15%
  • S&P 500 Index – a decisive break below 1158.00 in the SPX implies a 1095.00 minimum target. Watch out below if 1095.00 breaks
  • WTI – the crude oil bulls are in big trouble on a decisive close below the 81.30 level. Peg 73.55 the minimum target from there.
  • Gold – a decisive spot close below 1340.0 in our book targets to 965.0 minimum. And watch out below if 965.0 fails to hold.

“Viewed in an artist’s illustration created by NASA, the structure looks like two luminescent, purple, egg-shaped ovals sitting
on top of one-another, intersected by the tiny-looking Milky Way. In the actual images created from layers of processed Fermi
data, the lobes are still there, but are white with flecks of red, surrounded by a sea of blue and red gamma-ray activity — the
Milky Way forming a white slash between the two ovals.”

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