-So if the stock market’s 10% slide was simply a “correction”—as most of the talking heads seem to think—and if the subprime problem is “contained”—as most talking heads seem to contend, one has to wonder why the heck the FOMC felt compelled to step in at all…unless of course they know something that we don’t, or even worse, they don’t know what they don’t know!
The Great Liquidity Bottleneck of 2007
The two most notorious liquidity bottlenecks of the past 100 years took place during the 1929-1931 period in the United States and again during the 1990-19–? period in Japan. In both cases the liquidity bottlenecks were preceded by a huge surge of liquidity which subsequently created a huge boom in asset prices of all types—driven of course by investors’ use of too much leverage–and in both cases the inevitable bust was just as dramatic. The reason we think it’s so likely that we’re on the verge of the third great liquidity bottleneck is threefold. Number one, our model says it will happen, number two, the “backdrop” is correct, i.e. casinos, lotteries, art, real estate, and hedge fund billionaires etc. and number three…complacency is ripe with so many “experts” telling us it’s impossible.
Practically Everything is Over-valued and Over-leveraged!
Bubbles are funny. Most smart people realize that they’re in one as it unfolds but I guess their greed and ego must keep them involved right to the bitter end. Maybe they think that as long as they’re positioned close to the exit door they’ll have enough time to slip out with their sack of dough before everything crashes. Unfortunately for the less astute, the fact that the smartest of the group are always so near the exit means that many of them will actually get out the door—with their sack of dough in tow—and that fact only adds to the rapidity of the swing from optimism to pessimism which in turn accelerates the crash. The other sad fact—and it adds considerably to the debilitating length of the liquidity bottleneck—is that even the smart money tends to lose a decent portion of their wealth and, as the primary “middleman” and bubble facilitator, their lack of funds combined with a stubborn resolve in waiting for perceived value to re-appear, often act to prolong the cycle even further.
Full report coming soon
