Bernanke’s Bubble Lab

An above the fold story in today’s Wall Street Journal “Bernanke’s Bubble Laboratory” is about “a band of young scholars” the Federal Reserve Chairman and former Princeton professor hired to work at the university to figure out what causes stock market manias. The scholars concluded that the Fed should act to restrain bubbles, yet there’s no mention about Fed policies creating the nurturing environment needed for bubbles to grow. Perhaps these guys don’t want to bite the hand that feeds them. (Bernanke secured $10 million from a foundation to sponsor the research.)

Monetary policy is controlled by the Fed. Periods of excess liquidity and low interest rates feed bubbles as it pushes investors further out on the risk curve to obtain a decent investment return. The Fed funds rate is 2% and core inflation calculated by the government is running at 2.3% year over year. If I invest my money in a safe instrument such as an FDIC-insured Certificate of Deposit or Treasury bill, I will earn less than the rate of inflation – especially after paying tax on interest income. This economic environment pushes the investor into stocks and commodities. No offense guys, but this is not rocket science. Still, we’re curious to know what’s been brewing in the lab.

The herd/momentum mentality keeps bubbles growing. As more people tout how much money they’re making from the hot trend, more people pile in for their piece of the pie. The Shorts throw in the towel, and for a time nothing stands in the bubble’s way.

Friends and groups of people are ruled by Uranus and the sign Aquarius. From a financial perspective, the planetary energy of Uranus relates to trends and sudden and sharp price movements. It takes Uranus around 7 years to transit a sign. Other planetary energies and factors will come into play that will usually crash the trend before Uranus moves into the next sign. Uranus was in its “home” sign Aquarius from 1996-2003. Aquarius rules computers and the internet. From 2003-2011, Uranus is in Pisces. Pisces rules oil. A study by bubble lab economist Harrison Hong with Motohiro Yogo of the Wharton School has concluded that “’prices for commodities are expensive’ but not a bubble.”

The guys cite borrowed money as a factor fueling bubbles and the subsequent margin calls that force investors to sell when the market begins to turn down. Again we must look to the Fed. Alan Greenspan was consistently against raising margin requirements. A bill is currently going through Congress that would raise margin requirements only for oil futures trading.

The next bubble discussed is housing. Saturn takes a little over 2 years to transit a sign. From June 2003 to July 2005, Saturn was in Cancer, the sign that rules real estate. Numerous statistics cite the peak in house prices occurred in most areas in July 2005. The economists concluded that many people realized housing prices were unsustainable, but “betting against house prices is hard.” True, but housing bears during that time could have bought cheap long term out of the money Puts on the homebuilders and related offshoots of the real estate industrial complex.

From July 2005 to August 2007, Saturn was in Leo which rules all forms of speculation. Between mid 2006 and summer 2007, Saturn was opposing Neptune, the planetary energy relating to credit. The end of the housing bubble had morphed into excessive financial alchemy (Neptune rules magic). As Saturn approached the end of its Leo transit and had concluded its oppositions to Neptune in Aquarius, the credit crunch began. The commodity bubble began around the time Saturn entered Virgo last September.

And when do bubbles burst? When enough “skeptics are on board to bet against the bubble.” This is why the Princeton PhDs conclude that hedge funds are in the best position to profit. They jump on board the train in the early stage of the bubble, head for the exit when the train is almost full, and turn bearish.

Just like Greenspan, Bernanke has no desire to keep bubbles confined to the bathtub.

Related Post: “Stocks ‘Lost Decade” from a Planetary Perspective”

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