The Anti Bubble Has Surfaced

Includes: DIA, QQQ, SPY
by: Jack Miller

The lead article in the current issue of New Yorker Magazine is about economic bubble after economic bubble. The article explains how in current times we seem to go from bubble to bubble instead of a broad economic boom to a broad economic bust. No one seems to be able to understand why these bubbles keep occurring.

A lot of finger pointing has been directed at Federal Reserve Officials, at members of Congress and at the Bush administration. Alan Greenspan expressed the frustration of the most economically astute by saying that the current situation is a "conundrum". What is not fully appreciated is that in order to have a bubble, you have to have an anti-bubble and a new anti-bubble has surfaced.

At the heart of the "conundrum" is the fact that the real GNP continues to grow at a much faster rate than would be predicted by the rate of the 10 year treasury bond. Last quarter, the numbers defied belief with the inflation adjusted GNP at 4.9% while the 10 year was falling hard below 4%. The 10 year currently trades for 3.6% but how can it be that corporate profits are coming in at much higher rates -- AGAIN!

For old timers in the market, they just cannot get over the price of gold soaring to over $900 while the long bond also has soared in price. How can it be that we have high inflation and low inflation at the same time? During a time of confusion, the markets have not known which way to turn.

The news media, those guys who always try to make a mountain out of a mole hill, are in never never land. They have help to convince the American public that a heck of a recession is here. This morning, the numbers have once again upset the apple cart. Durable goods orders show that the economy is actually in a boom time. The world just does not seem to fit together the way it once did.


I have given the answer here many times before, but I can identify with the profit who cried out in the wilderness. If my words were more widely disseminated then it would not be just the market insiders who are buying stocks. The words I am referring to are the words about the extremely low inflation rate.

I think my readers and indeed most of the population appreciates that when a person pays $3.95 to watch a pay per view movie, versus driving to the video store to rent the movie for $3, he is actually saving. The total cost of the rented movie must include the cost in time and expense to drive to the video store twice. I have written dozens of times about how this and trillions of other daily activities is lowering the cost of living.

Everyone seems to understand that the electronic downloading of a movie or document is far more efficient than the physical delivery of the same movie or document. What is not appreciated is that the substitution of the inexpensive alternative represents a subtraction from the inflation rate.


For 25 years, China has been exporting dis-inflation in manufactured goods to the rest of the world. A slowdown in this exporting occurred last year because China temporarily ran out of energy. China could not continue to find more goods to make when it did not have enough energy to employ the hundreds of millions of people lined up to take the next products forward.

This is no longer the case. China is averaging adding a new power plant every fourth day! The environmentalist can whine all they want about how much more coal is being burned, but the result in the near term is that more and more goods can be made in China where the labor costs are low. As an aside, I would remind the environmentalist of two things, 1) Kuznets Curve is at work here and the environment will ultimately improve as a result of bringing China into the developed world 2) Cleaner alternatives would be used for power if the environmentalist were not standing in the way.

Anyway, the fact remains that 135 million people were lifted out of extreme poverty in the past 5 years while the rest of the world enjoyed lower priced goods. As the good folk at GaveKal Research have written, "The End is Not Nigh". The Chinese have the electric power to put another 100 million people to work over then next few years. As a result, the cost of manufactured goods will continue to fall.


The continuing movement of the poor into manufacturing jobs, combined with the continuing incredible advance of rapid transmittal of information is a powerful combination. The net effect is that "real inflation" (ha ha, that is a funny term), is almost negative!

With the GNP running at an average of better than 3% and the 10 year bond selling for significantly less than 4%, where is the inflation? Put another way, inflation is a measure of change and the big perceived change is in oil. However, the US only uses slightly more oil today than it did 35 years ago, Japan uses less. At the same time, we are using billions of times as much digital storage space but the cost of it has falling by factors exceeding 100,000 times.


As of Monday, 20 of 24 S&P Technology Companies had reported surprisingly good earnings. The headline in most papers was that new home sales were at the lowest level in 25 years. A short term figure was used to continue to exaggerate the severity of the "bad housing story". The median price of the average sale continues to make the news without any hint that the average sales price of the average sized house has not fallen. Yes, when times are tough, people may choose to buy a slightly smaller house but it does not mean that the economy will fall apart as a result.


From the Carpe Deim web site I read that 135 million people escaped poverty in the past 5 years. Prosperity is "breaking out" around the globe. In America people are about as anxious as they could possibly be because even the "experts" do not understand why there is one "bubble" after the next.

The anti bubble is a good thing. The anti bubble means that interest rates are very low, which means that the discounting of income streams yields soaring asset prices. The price of homes soared like never before from 2002 to 2005. Since that time, the prices have fallen back a tiny little bit relative to the prior climb. With interest rates back down, the tiny decline is over. Home prices and other asset prices are ripe for another big run.