It's interesting how bubble psychology works. When the price of an asset, such as stocks or real estate, is going up, everybody thinks that that higher price must be the true value. Only when the price is going down does anybody suspect the price might have been in a bubble.
You can see why former Federal Reserve Chairman Alan Greenspan said that bubbles are very hard to see until they have popped. People don't want to see bubbles on the way up — they want to believe that they are making a wise investment. But, of course, to become a bubble, the price of an asset has to go up.
What's really happening now is that many people on Wall Street are trying to fool themselves. They don't want to look at basic economic data showing very little growth. They don't want to look at revenues for the Standard & Poor's 500, which are now declining. They don't want to look at over a year of declining earnings growth. They don't want to see a global economy that is in or near a recession in most countries and, in the few having growth, they don't want to see the massive slowdown.
Most importantly, they don't want to see what is driving the entire "recovery" they like to talk about —massive government borrowing and massive money printing. The total growth expected in our economy this year — about $300 billion — is still much less than half of our government's expected borrowing this year. In addition, we are printing $1 trillion this year, which is helping both stocks and real estate asset prices.
The big recovery hasn't been in the economy, it's been in the stock market and other investment markets. Many people on Wall Street think a stock market recovery is an economic recovery. And, to some extent, the economy will recover as the market recovers. However, part of what makes Wall Street nervous, and, hence, so focused on cheerleading, is that the economy is still in trouble.
Despite the recovery in the stock market, the banking industry lost jobs last year and may well lose jobs again this year. Business journalism is feeling a lot of pressure since journalists for all print media are under big financial pressure due to the downturn in advertising.
Even CNBC has watched its ratings decline over the past few years. They desperately need a recovery or banking and business journalism will be facing big problems. Getting people excited about the stock market is the best way they know to encourage a recovery in their industry.
Of course, if massive government borrowing and massive money printing is the solution, let's do more of it. Why can't the government just offer home loans at 1 percent? The Fed could buy all the bonds they can issue. Wouldn't that help real estate? We're already buying $45 billion a month of mortgage bonds, why don't we do more?
What about car loans for 1 percent? Again, the Fed can buy all of those bonds too. No need for credit checks either. That would really help boost demand. Again, the Fed can buy all of those bonds, 1 percent or 5 percent, credit check or no credit check. They just print the money to buy them and all is well, right?
We know that's crazy of course. But, Wall Street can't spot the milder craziness of what we're doing now because they are so desperate for it to work. But just because they don't want to see a bubble on the way up, doesn't mean it won't go down. It just goes down harder — and, deep inside, they all know that's true.
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
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