The Return of the Worldwide Crackup Boom

What DOW 15,000 really means...
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The Daily Reckoning | Monday, May 6, 2013 The Daily Reckoning Monday, May 6, 2013 Euphoria reigns on Wall Street... The second coming of Mises’ mysterious economic event... Plus, Bill Bonner on the anatomy of a “worldwide” crackup boom... -------------------------------------------------- THIS Is What Can Happen When You Publish a Controversial E-Letter... It all began in January 1999, from a rented apartment in our Paris office: The Daily Reckoning was born. But now, after publishing over 13 years’ worth of hard-hitting, controversial articles and industry-leading forecasts... something shocking is happening to our most recognizable e-letter. Addison Wiggin explains exactly what happened in a closed-door meeting with Bill Bonner, and what’s going to happen from here, in a special presentation he created for readers. This may never happen again, so you don’t want to miss it. CLICK HERE to continue... Addison Wiggin, from Daily Reckoning HQ in Baltimore, Md.... “There’s euphoria today,” Stephen Carl, an equity trader with The Williams Capital Group told The Associated Press from the floor of the New York Stock Exchange (NYSE) on Friday, “that’s what you’d have to call it.” Euphoria. Brokers even “sported baseball caps emblazoned with ‘Dow 15,000.’” A look at the numbers shows eight of the 10 “industry groups” in the S&P 500 index rose. Risking stocks outpaced those that got sold off by 3-to-1. “Companies that stand to benefit most from an upturn in the economy,” the news tried to explain helpfully, “led the stock market up.” If you’re accustomed to subjecting yourself to The Daily Reckoning on a regular basis, you might be suspicious. We’ll spare you the suspense. We are, in fact, working our way to an alternative explanation for what’s happening in New York. Still, let’s continue. “Industrial companies,” the AP reports, “those that make basic materials and produce oil and gas rose the most in the S&P 500 index. U.S. Steel, General Electric and Dow Chemical were among the winners. Utilities, consumer-staple companies and other safe-play stocks trailed the market as investors took on more risk.” “We’re breaking through psychological barriers and that will continue to bring investors off the sidelines,” Darrell Cronk, an ‘investor’ for Wells Fargo Private Bank was also quoted as saying. “He called the jobs [in particular] news ‘wonderful.’” And there’s the rub. The stock market is rising and finally “making news.” For its part, the AP generically explains the rally as proof of the “recovery.” Specifically, trader Dave is euphoric at the prospect of investors finally getting off their butts... and handing their money over to him and his buddies again. We’ve seen this movie before. And unfortunately, we know how it ends. Like the late rebroadcast of a soccer game, it’s painful to sit all the way through -- if you already know who won! But we’ll try. Back in 2006 and 2007, we ran a series of essays right here in the DR dedicated to the anatomy of what the economist Ludwig von Mises called a “crackup boom.” “A ‘crackup boom’ is fundamentally a financial boom,” we later reprised the idea in Financial Reckoning Day Fallout “Money comes into the system -- a lot of it. People don’t know it’s phony money; they can’t tell the difference. This money hangs around the financial industry and everyone there has a good time. “But society, as a whole, is not any richer because Monet paintings are more expensive... or because stocks are more expensive... or because a hedge fund manager makes a billion dollars. Society is richer when people generally earn higher wages, stash away more savings and pay down debt. That is not what is happening.” It wasn’t happening then. And despite the AP’s explanations to the contrary, it’s not happening now, either. In our guest essay below, Bill Bonner walks us through the finer points of a crackup boom. It’s worth a read in context of the stock market flirting with historic highs once again... [Ed. note: Likewise, today’s DR PRO readers have been treated to “a way to grab onto all of the euphoria on the way up, without giving it all back (and more) on the way back down.” See below. If you’re not a PRO reader, please investigate further here.] But before we get to it, let us help you answer this question: “If this is, in fact, a classic crackup boom, what should I do about it?” One suggestion: Buy “trading insurance,” or for the purposes of this nostalgic episode of The Daily Reckoning let’s call it “crackup boom insurance.” From our own trading desk, Jonas Elmerraji helps put this “insurance” in perspective for us: “When you buy a $200,000 homeowner’s insurance policy for your house,” he says, “you’re saying that you want to be able to get $200,000 for your home -- even if a spaceship smashes into it while you’re out of town.” If you don’t end up using insurance, you’re out only the premiums you paid. You still have your house. “Crackup boom insurance” works the same way. You’ll pay a “premium” to know that you can get a certain price for your assets. The worst case is the bust never comes: You’ll lose the premium, but still have your assets. But they don’t sell insurance when you need it, and if the bust does come, you’ll be glad you had it. [Ed. note: Jonas is conducting a 21-Day Trading Experiment in which he both has the time and space to show you how to trade profitably... even in the throes of a crackup boom. Jonas conducted a similar experiment in January 2013. Here’s what participants had to say about their experience then: “Jonas, great trade! Eight days for a 15.26% return. A hundred shares cost me $2,790.99, including commissions. I walked away with $425.94 after commissions.” -- Mike P. “On my first trade with you, I bought 100 shares at $28.34 and sold it at $32.45. My cost to buy and sell was $10.00 total. I made $401.00 on a $2,844.00 investment in eight days. That’s 14%.” -- Steve C. “I bought 350 shares at $29.32 and sold today for $32.37 with profit of $1,067.54.” -- Pete J. If you’re interested in obtaining some “crackup boom insurance”... or are simply looking for profitable trading ideas in these admittedly frothy markets... Jonas’ 21-Day Trading Experiment begins today. There’s no obligation to buy anything. Mr. Elmerraji would just like the opportunity to prove to you he can help you make money even if the crackup boom... er, busts. You’ll find details, for free, here.] External Advertisement A big change is about to catch Republicans by surprise A Maryland financial journalist says a scandal brewing in D.C. will soon catch most Republicans by surprise and will radically alter the political system and the entire nation. Get the full story here... The Daily Reckoning Presents: A Daily Reckoning classique, originally broadcast on June 27, 2007... The Return of the Worldwide Crackup Boom By Bill Bonner A kiss is still a kiss. A sigh is just a sigh... And a bubble is still a bubble. When a kiss is over, it’s over. When a bubble pops... well...that’s all she wrote! All kisses end -- even the wettest “French” kisses. And so do all bubbles -- even sloppy mega-bubbles of liquidity. This one will be no exception. But of course, it’s not the certainties that make life interesting... it’s the uncertainties -- the known unknowns and the unknown unknowns, as Mr. Rumsfeld says. We are all born of woman and end up where all men born of women end up -- dead. But that doesn’t mean we can’t have some fun between baptism and last rites. You’ll remember we said that this worldwide financial bubble is both worldlier and more financial than any in history. And for the moment, it is very much alive. So much alive that the media can hardly keep up with it. Forbes magazine, for example, tries to estimate the wealth of the world’s richest people. But the rich don’t typically give out their balance sheets, telephone numbers and home addresses. So there’s a fair amount of guesswork in the calculations. But when it came to guesstimating the net worth of Stephen Schwarzman, founder of Blackstone, the Forbes crew wandered off into fiction. They put his wealth at about $2 billion. Recent filings in connection with the new Blackstone IPO show he earned that much in a single year! In this phase of the bubble, it is as if your neighbors were throwing a wild party -- and you weren’t invited. You detest them... envy them... and want to join them, all at once. A very small part of the population is having a ball; everyone else is getting restless and wondering when the noise will stop. We wish we knew. And we’ve given up guessing. Meanwhile, the experts, commentarists, kibitzers and analysts are saying that there is a whole new phase of the giant bubble about to unfold; things could get a whole lot crazier. Even many of our respected colleagues are pointing to a text by the great Austrian economist Ludwig von Mises for a clue. What we have here, they say, is what Mises described as a “crackup boom.” Before we go on, readers should be aware that the Austrian School of economics is probably the best theory about the way the world works. Like The Daily Reckoning, it is suspicious of efforts to control the natural workings of an economy, in general... and suspicious of central banking, in particular. The fact that it was a one-time “Austrian,” Alan Greenspan, who became the most celebrated central banker in history only increases our suspicions. He was able to master central banking, we imagine, because he understood what it really is -- a swindle. “THE $11 BILLION RUSTENBURG EFFECT” Right now, a market force that barely anyone knows about may be coming to a head. One major financial publication even wrote that this shocking news is going to be a “game changer.” It has the potential to double every dollar invested, but before it does, four predictable events must occur that could give investors a heads-up they usually never get in these situations. Don’t let it go to waste. Click here to learn all of the details. What is a “crackup boom”? Von Mises explains: “This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy. “But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crackup boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. “It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796 and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.” Mises is describing the lunatic phases of a classic inflationary cycle. At first, no one can tell the difference between a real dollar -- one that is earned, saved, invested or spent -- and one that just came off the printing presses. They figure that the new dollar is as good as the old one. And then, prices rise... and people don’t know what to make of it. Later, they begin to catch on... and all hell breaks loose. You see, if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day. Von Mises died in 1973 -- long before this boom really got going -- let alone cracked up. He may never have heard of a hedge fund... or even a derivative, for that matter. A world money system without gold? He probably couldn’t have imagined it. People spending millions of dollars for a Warhol? Twenty million for a house in Mayfair? Chinese stocks at 40 times earnings? He would have chuckled in disbelief. He understood how national currency bubbles expand and how they pop, but he probably never would have imagined how insane things could get when you have a whole world monetary system in bubble mode. He’d have recognized the beginning of this bubble... and he’d have recognized the end, but the middle... or the beginning of the end -- that would have dumbfounded him. During his lifetime, he saw a crackup boom in Germany in the ’20s... and a few more here... but he never saw a worldwide crackup boom. No, dear reader, no one, anywhere, has ever seen a worldwide crackup boom. We’re the first ever. And we get to experience it twice. Pretty exciting, huh? Regards, Bill Bonner for The Daily Reckoning P.S. Again, if you’re interested in obtaining some “crackup boom insurance”... or are simply looking for profitable trading ideas in these admittedly frothy markets... Jonas’ 21-Day Trading Experiment begins today. There’s no obligation to buy anything. Mr. Elmerraji would just like the opportunity to prove to you he can help you make money even if the crackup boom... er, busts. You’ll find details, for free, here. Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, feel free to cancel your free subscription here. By submitting your email address, you consent to Agora Financial delivering daily email issues and advertisements. Please read our Privacy Statement. 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