The Bubble Machine

The U.S. stock market (Dow, S&P, Nasdaq) is in a bubble unparalleled in human history. This includes: the South Seas mania, the Tulip Bulb craze, the 1920s insanity, the bubble, and the housing/mortgage debacle of 2005-2008. For 10 years the stock market has breathlessly raced upward in acrobatic levitation, pausing very rarely.

The singular source of the bubble is of course the Federal “Reserve”. The Fed has no reserves; its only assets are mostly worthless paper. Nonetheless, it creates “money” and shovels it to the top tier banks, dealers and other favored entities. Loan demand is slight to non-existent, and therefore these institutions, lacking other credit worthy places to employ the money, have no recourse but to buy stocks, stocks and more stocks. The financial world has been so squeezed into this singularity that it is the only game in town.

One of the problems is that the stock market “averages” mask the thermonuclear caldera below. The Dow etc, are currently trading at historically extreme valuations. But far more dangerous, however are the hundreds of stocks outside the averages, involving billions if not trillions of dollars, trading at cosmically absurd levels. One example of hundreds is the stock of company WXYZ, an internet software company. The company has an astronomical market capitalization of $39 billion dollars, has $1.1 billion in annual sales, trades at infinity times earnings (it has no earnings), 14 times alleged book value, and a price to sales ratio of 36 times. It, and its ballooned multi-hundred look alikes are the driest of tinder.

The real catastrophic threat is that these bubble stocks will blow rather simultaneously, and when they do blow they will have a good chance to devastate the entire stock market, the financial markets, and the economy. This junk as well as all the more rationally priced “good stocks” will be liquidated to meet margin calls, balance sheet requirements and all the other hardwiring needs of the financial markets. There will be a manic and panicked scramble to salvage anything. The balloon blowing Federal Reserve has only itself to blame, but the entire populace will suffer immeasurably when the convulsion occurs.