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We've Seen This Movie Before


Another man-made bubble lurks.


"Let me tell you something my friend. Hope is a dangerous thing. Hope can drive a man insane." --Ellis Boyd Redding, Shawshank Redemption

Is anyone else having the strangest sense of vuja de? Like, we've been here before and sincerely wish we weren't?

Taking a page from the last ten years, the policy response to the most recent crisis has masked the disease with drugs rather than curing it with medicine. It, pardon the burp, gave the drunk another drink with hopes he doesn't sober up.

We proactively monitored this Sisyphean process for many years and watched it morph more often than The Wonder Twins.

Form of... dollar devaluation!

Shape of... social mood!

Through it all, we offered that the elasticity of debt would be the key determinant of "success" and one day that bubble would burst, following the all-too-familiar scripts of technology, housing and China.

Except this one, we maintained, would be the MOAB (Mother Of All Bubbles).

The point of recognition arrived late last year and evolved the financial crisis into an economic reality that manifested throughout the societal spectrum. The "all in" policy response may have saved the system but it came at a profound cost.

Pick A Side or Step Aside

I, like you, stand to gain from continued prosperity and sincerely hope the worst has passed. I would be remiss, however, if I didn't remind investors that hope isn't a viable investment strategy and there is a difference between legitimate expansion and debt-induced largesse.

The most vicious cyclical rallies occur in the context of a secular bear markets but perspective is necessary as we together edge ahead. Indeed, Japan witnessed four rallies of 50% or more since 1990 yet the Nikkei is still some 70% lower almost 20 years later.

The script for the bulls is akin to a relay race; the government-sponsored euphoria will hand the baton to corporate America who will, in turn, pass it to the consumer. The question is therefore begged; where are we in this process and how long can it last before perception and reality merge?

At the end of the summer, a member of the Minyanville community passed along this blurb from Fred Hickey, a gentleman I have the utmost respect for, which was included at the end of his most excellent newsletter. And I quote:

"We may be seeing early signs of the next bubble(s). I worry that it will be even more difficult to take short positions against stocks than it was leading up to the market tops in 2000 and 2007 – as hard as that may be to believe."

Fred, along with my friend Bill Fleckenstein, not only nailed the front end of the financial implosion but were prescient enough to cut bait on their bear bets on the back end. When I read observations from such a savvy seer -- his nod to the potential for massive quantitative easing -- I sat up and took notice.

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