Living on the Bubble

Some bubbles are more resilient than others.

Some bubbles have a significant amount of yield to them, depending upon how fully they were inflated and how sharp the object poking them is.

Some bubbles have thick, yielding coverings and are never inflated to rigidity beyond the point at which little kids sit on them and bounce along happily.

No bubbles can be reinflated after bursting, not even the ones which are blown through a little straw from smelly goo and harden almost instantly, a favorite toy of my youth.  Those wonderful bubbles could be pinched close to survive quite a while after the first rent appeared, and stuck to each other in the most delightful fashion.

Some bubbles can be reblown almost instantly and infinitely, particularly from gum formulated for that purpose.

You now know all there is to know about bubbles except what the title of this article means.

Bill Bonner made another excellent point recently:  why hasn’t the bond bubble burst messily all over the scenery?  I’ll play Cindy Lou Who:  is it because, Mr. Bonner, the wind blowing out of Washington gives the appearance of increasing activity and many people haven’t caught on that the wind is circular (as are those in hurricanes and tornadoes) blowing the money around and around through the Fed and the Treasury and the Banks?  Sound and fury, signifying nothing?  Far more apt than the Bard, the sound and fury which some of us have seen rising for many moons indicate that when this whale finally blows there’s going to be a spout to end all spouts and Moby Dick (if we even have a Moby Dick in this scenario; it sure isn’t Ben Bernanke.)  is going to go back to port and sit in the local sailors’ bar telling sea stories.

Our own beloved Gary Gibson pointed out recently that sometimes we’re a little off in our timing, but that it is better (and far more comfortable in the long run) to see problems and react early.   Y’all know my inner Cassandra:  sometimes she’s early in her warnings but sooner or later she is almost always right, and it is a whole let better to begin our preparations as soon as we can rather than to wait for further cracks to appear in the walls.  Sometimes, true, our fears are OBE, “overtaken by events.”  My detractors (who are blessedly few that I know about) point out gleefully that I was wrong about the Democratic National Convention slightly over a year ago.  I reply sweetly that Hillary Rodham Clinton may not have stolen the Convention from Barrack Hussein Obama–I’m still astounded that she didn’t–but that if she had done so there would have been riots in the streets.  It cost none of us anything to keep our heads down quietly in the country that week just in case.  Slight ridicule is a very small price to pay for having taken out an insurance policy that lapsed unused.  Most insurance never pays off, but when sixty years’ growth crashes across the roof (as happened to us two weeks ago) in the course of a storm that didn’t last five minutes paying the premiums makes excellent sense.

The Bond Market is going to go “Kablooie!” with ricocheting remnants that will have us whimpering for the good old days of upside down mortgages.  Which won’t have gone away either.  Which will probably have been augmented by the commercial real estate bubble which is covered by an integument stretched so thin that we can see through the shiny spots.  Go drive by any strip mall at random. Look at the Big Front stores.  They have “for lease” signs in the windows.

How could this not be so?  The bonds are of even less value than the currency which, by definition, is worth less every time a new cargo ship full of fiat money blows out the doors of the Treasury.  “Safety” is locking your current value into government paper at an interest rate that is lower than anything since the day before someone thought the concept up?!  Said value to be replaced at a later time in valuta that cannot fail to be worth less at a time when inflation has risen steeply?!  Anyone who thinks so should just go blow the money now in Vegas.

Which takes us over to “Why is there no inflation?”  At present in selected areas there is deflation, which in this case means you can buy a horse and buggy for a quarter of what they cost three years ago because almost no one has money to put in horses and buggies and even fewer see any need for them.  The carriage trade is still a small elite, as it has always been, as it will always be.

Inflation is defined casually as “more dollars chasing fewer goods.”  There are still plenty of goods, another situation that must, of necessity, by definition, change in the foreseeable future.  The more dollars aren’t chasing them because those who have more dollars are at government levels or in unions or in Hollywood, but they aren’t down here at the grocery store level.  They aren’t walking into car dealerships, where one out of four Cash for Clunkers suckers is feeling buyer’s remorse.  The dealers haven’t been repaid the $4500/car they fronted for the government and every car that goes back to the bank or dealer has lost the 20% or whatever it is now that it lost the moment it was driven off the dealer’s lot.  That’s one reason we passed a dealership yesterday offering to finance a major car brand for nothing for five years.

We have several situations which are going to collapse or explode and the only questions are “When?” and “Which comes first, the ARM mess or the Bond debacle or the Commercial Real Estate plummet or the next round of the Dow dive-bombing or devaluation of the currency either through butterflies being loosed in the Far East or deliberate governmental action?”  I don’t know.  It doen’t matter.  What matters is to be sure you don’t have funds tied up in any of those but have stored all of your value elsewhere.

I’m watching silver nervously.  Watching.  As ancient wisdom and Gary noted Friday, if you don’t know who the mug in the game is, you’ve already been tagged to be “It.”  Those of us with low, cunning, suspicious minds remain convinced that there are mice in the clockwork and those account for the strange things the clock has been doing.  We don’t perk right up, preen ourselves, and carol, “SEE!  We told you so!  We told you to buy silver.”  At least I am hunkered down in our little Whiskey Bunker. I don’t jump on invisible magic carpets because a genie invites me for a ride.  I don’t pounce on unseen coattails that may be whisked away before I have even located them, leaving me to fall on my face.  If some fellow tries to pick me up in a drugstore I don’t suppose I’m Lana Turner, an example so old it may be meaningless to anyone under seventy.

Yeah, long term silver is going up, and up, and up because it is real “money.”  Between now and at least the end of the year silver is almost certainly someone else’s game and he/she/it isn’t telling me the rules.  I understand Quidditch perfectly.  I can tell Offsides from Encroachment.  (No, gentlemen, the little lady isn’t trying to show off and revealing her ignorance.  She’s telling you that she has been in the game long enough to know that Offsides is Offsides no matter what you call it.)  I don’t know who or what is pulling the strings in metal but I’m content with the cheese I stole off the trap for now.  When–if, admittedly–silver gets below $13 again I’ll start buying again.  In the meantime, I’m going to store value in Galvalume.  Snap-ring barrels.  Whatever I see that is a traditional trade good, item that is always useful, or luxury at a great price.

I just bought two septic tanks!  Wow, is that a sexy investment, or what?  Well…if you want to circle the “guest quarters” (aka motor homes and travel trailers), and it will cost $20,000 plus tax to “have the man come do it,” and your gravedigger’s back hoe will dig out holes to bury the concrete vaults in a couple of hours…so far as I’m concerned we just turned eight hundred dollars into a twenty-five-fold profit AND the septic tanks will not be subject to costly annual inspections by the government.  And that’s without figuring the 8.25% tax in my head while typing although it should be obvious that it will be on the close order of another two-point-five increase.  If this is not intuitively obvious you’re probably buying into a PE of 130.  And you don’t read W&G.  Or you weren’t taught arithmetic in the Forties.

I got a diffident note from an old friend who sent me–pleased chuckle!–today’s Daily Reckoning.  Said friend doesn’t know investments from vestments from verticulitus.  This may well be the modern version of the urge to stuff gold coins into the straw, when people who have never had any interest at all are trying to find out what is going on.  And where better than right here?!

I’ve run out of space to tackle the unemployment and the jobless, venture capital-less, expansionless, profitless in most sectors, meaningless “recovery,” so I’ll close with where I intended to start which is saying that the giant sucking sound isn’t jobs going to Mexico, it is the millions who are living on the bubble.  That doesn’t mean those who profited from the real estate market collapsing or playing ring-around-the-banks.

I’ll put this first in the form of an old joke:  if you and I are walking through the woods and a bear rears up out of the berries and starts chasing us, I don’t have to run faster than the bear, I only have to run faster than you do.  Or climb a tree before you think of it.  Whisk myself to safety, and the Bear take the hindmost.

“Living on the bubble” is a racing term.  Let us suppose that 40 people will qualify to enter the Indianapolis 500 or whatever.  There are still trials going on, and you’re in 40th place.  Never mind the 39 ahead of you; you had your chance and you didn’t best them.  What you must worry about are the ten left who could still knock you out of competition.

That’s living on the bubble.  That is what almost all of us who don’t own thousands of hectares in Argentina are facing.

Don’t look forward other than to avoid snares, pitfalls, swamps, and alligators.  Keep your eye on the bears and those thundering up on your six.

Linda Brady Traynham

September 10, 2009

The Daily Reckoning