From Son of FrankenMarket (June, '06): Boris Karloff's third and final role (there were many more regrettable sequels to come later) as the most famous monster of all time came in Son of Frankenstein (1939). The movie was considered credible but despite having the biggest budget, was not up to the standards of the previous two. If there is to be a Son of Frankenmarket, it will need a bigger budget as well because it will be an exercise in the law of diminishing returns, whereby more and more liquidity (inflation) is required to achieve ever-less satisfying results. In fact, this phase of Frankemarket's journey could become a slippery slope right into Abbott & Costello Meet Frankenstein (1948).
The great inflation-fueled bull market had its improbable beginnings in the early 1980's as gold was blowing off, Paul Volcker was whipping the effects of the previous inflation and the public was anything but turned on by the thought of buying stocks. Quite frankly, at the time I was thinking more about how to get a girlfriend or what bands were playing in Boston then anything having to do with stocks or finance. So I am unqualified to go on about what a great buying opportunity it was. I will leave that to Richard Russell, Robert Prechter and others who made the call. Suffice it to say, the birth of this bull market led to eventual paper wealth creation and economic expansion unimaginable to most at the time. It also led to cemented perceptions by the public; perceptions that became as strong in the late 1990's in favor of stocks, bonds and all things paper as they were against same in the late 1970's. It was the best of times and the stock market was a thing of beauty and envy. But it was also a thing of greed, excess and gamesmanship.
Then, in the year 2000 something changed. It turned out there was nothing new under the sun in the 'New Economy', brick and mortar companies actually did have value (assuming they were well managed) and scores of dot.com and technology converts watched their paper wealth plummet like a led balloon. By way of disclosure, I was actually quite sweet on the optical networking sector in the late 1990's. How did that work out for me ;-)?
But the resulting deflationary impulse (brought about by deflating stock bubbles as greed and confidence morphed through the usual stages of denial, anger, bargaining, depression and acceptance) exposed the ugly side of the boom/bust fiat world; everything is fine as long as assets are rising. But in the dark days of 2000-2002, which included the previously unimaginable horror of 9/11, the questions became "Where will this stop? Is there a bottom?". The questions were even more profound to those who bothered to look at the dynamics of the global economy which was increasingly dependent on outsourced foreign productivity and American consumption. In a credit (debt) based global economy, Robert Prechter's now projected 'crash' simply would not do. No, it would not do at all.
Enter the maestro. Enter the time tested and celebrated Doctor Greenspanstein. It can be argued that Adonis had long since begun to fray at the edges and betray an inner ugliness, but from the first jolt of credit mainlined into its veins, Adonis the wonder market had ceased to live. It was now FrankenMarket, a beast that would need ever more credit creation to keep it from turning on its masters. This market was now dependent on increased inflation to stay animated.
Bud & Lou
With the scary mortgage and other credit/debt events - long foretold by observers such as Doug Noland - now on open display to the public and major financial media, it is well past time to take stock (no pun intended) of personal finances and ask the hard questions; the why's, how's and what for's of the reflation economy. Biiwii.com started to ask those questions in 2004 in the hope that some people would try to shed the casino mentality and assured confidence that 20 years of bull and inflationary policies had bred in the general public and financial media. While we have generally moved toward technical analysis and major investment trends since then, a tone of grounded realism remains vital because this latest sequel, Abbott and Costello Meet FrankenMarket is no laughing matter.
Doctor Bernanke is now keeper of the castle. The monster is by now staggering all over the countryside, one day falling and rolling down a hill and the next day climbing back up again as it tries so hard to make it back to the castle for another jolt of juice. Fully alert public perceptions mix with a 'sell anything at any cost' mentality by hedge funds seeking to get liquid and de-leverage. Come to think of it, this shlocky sequel to FrankenMarket actually has an interesting sub-plot; will the doctor be in and will he provide the rate cuts that the bond and stocks markets have already insisted upon? Will they work as the current summer rally would have us believe? Stay tuned... and if you have not yet done so, get a plan toward safety in place.
I say toward safety because after all US Treasuries, as with the bonds of most governments, provide you with negative exposure to long term inflation. While they can be suitable for short term liquidity needs, there is another asset that is no one's liability but pays no interest. People who have opted out of the casino find value in that however. At best, treasury and government bonds are Young Frankenstein (very funny) in their relative quality during short term turbulence. A traditional stock and bond mix with no regard for the dynamics of the unwinding credit bubble is Bud & Lou, featuring the immortal Glenn Strange as the monster. The first stage in the bull market in hyper-risk began in 2000 and was the amazing Boris Karloff as the monster. By now the bubble in risk is wrapping up the set and our little Frankenstein metaphor is done.