To Emily, I believe that the next bubble will simply be bigger. Without government intervention, financial affairs will not escalate like what they did in NASDAQ 2000, and the recent housing bubble. Fed will definitely try its best to direct all the money into their desired targets: US stock, real estate, and bond markets, but not commodity market. But I don’t know who will win out at the end. I think truth eventually prevails, but it may take a LONG time.

To LAMoneyGuy, yes, the current stock bull run has been really long, but I think it will simply run slightly longer than everyone expects.

To Economic Edge, thanks for your pointer. However, according to the broadest measure of M3 money, no longer available, but being measured by Shadow Government Statistics, M3 money is still growing at a rapid rate.

By the way, I believe the current stock market rally is due to Fed’s buying of stock market futures. Fed is not supposed to take ownership of the public companies in terms of shares, nor having any preferential treatment of any individual companies. Certainly the best way for Fed is to go into futures pit, and start buying BIG. Whether Fed gains or loses money is not its objective at all. Money is simply created or lost through such intervention. As long as stock market is held up, that’s more important. Having caused all the shorts losing money is even better. That’s equivalent of putting money into the stock bulls, and that’s what Fed wants, creation of money, and asset value held at the higher level.

I expect the “stable money” policy to be temporary. If it persists, the U.S. may end up with a recession. We already have an inverted yield curve.

Housing bubble. The pundits who say that we have already bottomed or are bottoming are a joke. They were the ones who said that prices will not go down because they are “sticky.” Minimum 3-4 years for this to play out.

Stock Market. We are currently four years into the current bull market. Mature by any standard. Market cheerleaders think discussion of a bear market is doom and gloom. It’s just the way of markets. The fundamental environment looks very poor for the market. Not a time to run for the hills, but caution seems in order.

Money is borrowed into existence. When you borrow $100 from the bank, you have $100, but the bank still has $100 on its books. So $100 is created. When the loan is returned or when bad loans are written off, money is destroyed.

On the topic of how the Fed increases money supply, you can google “repo” which stands for “repurchase agreement”. The New York Fed through its “open market operations” lends money to the big banks while the banks give their treasury securities as collateral. The banks aggree to “repurchase” those treasuries when the loan is due. Hence the name “repo”.

The housing bubble is a consequence of this money growth. Many also see it as one aspect of the credit bubble that never deflated even after the dot com collapse. In the past five years, that money has been going to housing, commodities and emerging markets. If you were in those, you were in line for the Fed handout.

The real question here is what a crashing housing market is going to do to this credit bubble. We know that the Fed will likely cut rates to stimulate the economy at some point, the debate is on the effectiveness of that action. If we get deflation, then treasuries, cash and gold will be preferrable, in that order. If we get inflation, then gold, commodities, stocks should do best.

Nobody can say for sure which outcome will transpire. The best course of action I can advise is to live beneath your means and diversify, unless you know someone named Hank Paulson in which case you can probably find out where the hot money will go next.

ML