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Welcome back to bubble-land

The price of gold went up 2% today and is continuing to rise to record highs daily. Before the crisis, purchasing gold would be the action of a conspiracy fanatic who speculates the world will soon end. The conspiracy may be right. It has become apparent that the Fed and treasury have decided to clean up the mess from the real estate bubble burst by creating a new bubble. This time we have a commodities bubble. First seen in gold to protect against inflation, it is only a matter of time before other commodities, including food, are hit.

With the printing of money at almost inconceivable rates devaluing the dollar, investors, especially foreign investors, are going away from the dollar in favor of commodities. So much money means massive inflation in the (near?) future. But what of the markets? The Dow has shown impressive increases also, going back to above 10,000. This is illusory. There is still a lot of money on the sidelines not being invested, and the Fed has supplied a lot of the money now being invested. The converse of the stock market is the bond market. The yields on bonds are still relatively low. This means investors are not needing a lot of incentive to buy bonds. How can the bond market, commodities and the stock market all see impressive performance?

The answer is in the disconnect between Wall St. and Main St. A lot of the impressive Dow performance is derived from direct government interference. The federal government owns major manufacturers and financial institutions. While a lot of stock performance is from the government propping up financial institutions, bond markets rallied by investors seeking safe harbor for their “real” money. These investors seemed more than happy to take the “stimulus” money and drive up risky equities but did not have the confidence of their analysis to use their own money. Their money, the “real” money is going first into bonds, and more and more into commodities, led by gold.

Taking into account the belief that the current high unemployment will not end for a year, the flight from risk is understandable. However, the flight is mixed. Asset backed securities are on the rise again. But this is again thanks to government interference and oceans of cash looking for places to flow.

The current situation is now purposefully obtuse, so either listen to all pundits especially when they contradict each other or ignore all of them and trust your instincts. Even if we get a Keynesian paradox of thrift, where saving money is good for a person but bad for the overall economy, as they are not consuming, the effort to devalue the dollar to create new bubbles is doomed to failure and should be avoided. A more stable economy is needed with more manufacturing. America, and Boston, needs to make more things to be sold in free markets. Markets need to be opened with free trade agreements. The tinkering of economists cannot long last, and devaluation may have helped in the ‘90s but there is only so low the dollar can go. The world no longer believes the strong dollar commitment from the Treasury and is acting accordingly.

It was little noted that China lectured America on its dollar and trade policies. When Chinese students openly laugh at the treasury secretary who tried to convince them their US assets were safe, only America is believing its policies are sound in the long term. New bubbles are being deliberately created and when they pop the world will again suffer. The only hope is that Bernanke has learned from the Greenspan folly and the Fed should try to prick bubbles rather than let them run their course.

In any event, Boston is poorly positioned to accommodate the oncoming storm. The latest downturn may have been the overture. Taxachusetts penchant for increasing taxes and regulations precisely when they should be eased will make the situation worse for this area. Call the statehouse and ask how the increase to the sales tax has worked out for state revenues.

So hunker down and batten the hatches, as things will not get better for some time. And may even get worse. If the gestimated 30% chance of actual growth comes to Boston, then you can at least come out and enjoy the sunshine. Just make sure it is not the eye of the storm crossing bubble-land.