Deliverance From Draining Liquidity

by Bill Bonner

What will happen to pull the plug on this huge bath of liquidity? We can think of several things:

1) Corporate profits will revert to their historical mean. Investors will realize that stock prices are too high…that they have been too optimistic. Stocks will fall; maybe they will crash.

2) Bond prices will collapse. Spreads between high quality bonds – Treasuries – and junk bonds have never been thinner. When investors get worried…spreads will narrow. Bond prices will fall. Billions in liquidity will be lost overnight.

3) The property market is vulnerable too. Housing in America is soft. It will take years to squeeze the juice out, but the future has plenty of years. It is not unlikely that at some point, householders – who are already feeling the squeeze – will begin a panic of saving. Consumption will tumble. The economy will grow cold.

4) Are there no geopolitical risks? What sort of a headline would it take to cause speculators’ blood to run cold? We don’t know, but we imagine there are many possibilities.

5) China’s economy and its stock markets are plainly bubbles. Are there no pins in China? Plenty of them, is our guess. There is always a leading market in any bubble. Generally, the leading market is the one that gets the pin first. And when it blows…the whole thing blows.

6) Private equity, structured finance, hedge funds, derivatives…there are a lot of players and a lot of games going on in the financial world. Not all the players are geniuses. Not all the games are straight. And not all the casinos are run by Presbyterian ministers. There are bound to be some stories…bound to be some scandals…and bound to be some spectacular losses. Will any be big enough to blow a hole in the great bubble? Maybe…

7) Finally, all the Anglo-Saxon economies are deeply in debt. We wonder where, how, when, and will they have to change course. You cannot really get rich by going into debt. So when people appear to get rich…and appear to be going deeply into debt, we sense that there must be a skunk in the woodpile somewhere. Something just doesn’t smell right. No one wants to dig around and find out what it is…but somehow, someday, it is bound to turn up. Then, people will hold their noses…and rush for cover.

What can you do to protect yourself, dear reader? A single, simple thought: Over the last 12 years, the supply of dollars has increased at roughly 10% per year. The world’s economy has grown at roughly 3% per year. And the world’s supply of gold has increased at only 2% per year.

We buy gold…and wait to see what happens.

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt