Is Bernanke Manufacturing The Next Great Bubble?

Many traders and investors believe that bubbles are created by easy money policies. While this is likely to be true it is not the only reason why bubbles are created. Often, the public will become obsessed and euphoric with an idea and that will usually cause the bubble. For example, the latest and greatest housing and credit bubble that occurred in 2007 was partially caused by the Federal Reserve chairman Alan Greenspan when he lowered the fed funds rate down to 1.00 percent in 2002. The easy and cheap money allowed individuals to take out extremely cheap loans to buy houses they simply could not afford. Sub-prime loans grew out of control and a bubble was formed as the public wanted to own a house at any cost. Ironically, the bankers also fell into the euphoria and loaned money to anyone that could sign their name on a dotted line.

Now money is extremely cheap again as Federal Reserve boss Ben Bernanke has the fed funds rate at zero to a quarter percent since December 2008. The low fed funds rate allows the large banks to borrow money at basically no interest. While many people think this is going to create another bubble it may not happen so quickly this time. You see, banks are not lending the money to just anyone any more. In order to get a loan the public must have a very good credit score, documentation of income, and a job. The money lending banks have completely done a 180 degree move when it comes to money lending. This new lending policy by the banks will eliminate a housing bubble in the near term. Another reason why a housing bubble will not occur again so quickly is because the public has now done a 180 degree turn in their thinking. A large percentage of the borrowing public would rather rent a house instead of owning a home. So if there is going to be a housing and credit bubble again it will be much further down the road.

Now, that we know that there is not going to be a credit and housing bubble again anytime soon it does not mean that there will not be another bubble at all, there will be. This time, the next bubble will likely be a stock, and commodity bubble. This is not just being caused by the Federal Reserve (U.S. central bank). This time the next bubble is being caused by almost every central bank in the world. Just think about it, the Bank of Japan, The People’s Bank of China, European Central Bank, Swiss National Bank, Bank of England, Reserve Bank of India, Reserve Bank of Zimbabwe, and others are all printing money at an alarming rate.

The stock market has rallied on the back of quantitative easing or bond buying as it should be called. This lowers interest rates artificially and puts money into the large banks. These banks invest the money and inflate asset prices. So obviously, the next bubble will be in stocks and commodities if one occurs. Now you might be asking when this next bubble will occur and take place, that is still unknown to most. What traders and investors must do is to simply follow the charts and when the charts form certain bearish patterns it will tell us that another bubble could be about to pop. In my honest opinion, another bubble is likely to occur further down the road. Traders must remember, bubbles are euphoric and the public is still must too pessimistic at this time for a major bubble, however, that does not mean that a bubble is not forming.

Some equities that traders should follow for clues to the next bubble include PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), United States Oil Fund LP (ETF) (NYSEARCA:USO), iPath Dow Jones UBS Copper Total Return Sub-Index ETN (NYSEARCA:JJC), and obviously the iShares Gold Trust(ETF) (NYSEARCA:IAU) which is a way to play and track gold.

About Nicholas Santiago 575 Articles


Nicholas Santiago started trading in 1991. In 1997, he became a licensed Series 7 and 63 registered representative. He managed money for a large, affluent private client group. After applying his knowledge to his client base, he decided it was time to begin teaching those interested in learning his methods. He is an expert in Technical Analysis. He has become an accomplished technician in the studies of Elliot Wave, Gann Theory, Dow Theory and Cycle Theory. In 2007, he partnered with Gareth Soloway to form InTheMoneyStocks.Com and realize his dream of educating others about the truth of the markets.

Visit: InTheMoneyStocks

Be the first to comment

Leave a Reply

Your email address will not be published.