Bubble, Bubble, Economic Trouble?

Zimmermann points to worrying factors amid a recovering economy

Angel Abcede, Senior Editor/Tobacco, CSP

Walter Zimmermann
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Before you run screaming to save your 401(k), talk to Walter Zimmermann.

Then run screaming to save your 401(k).

Zimmermann, chief technical analyst for United-ICAP, Jersey City, N.J., named three destabilizing forces that may derail any type of economic recovery the country is experiencing. Calling them “risks you wouldn’t have normally thought of,” he named Russian President Vladimir Putin and climate change as two, with the third, the Federal Reserve, the biggest danger.

A combination of unprecedented weather, potential hostility from Russia and moves by the Federal Reserve to artificially inflate the value of stocks are leading to or are symptomatic of yet another economic bubble—one likely to burst as dramatically as the housing and dot-com booms of years past, he said.

Addressing attendees at the SOI Summit, Zimmermann said many signs point to the existence of a dangerous bubble, including stock-price trends that resemble the lead-ups to other historic bursts, as well as the sluggish state of telltale commodities such as copper and gold, which in a true recovery would be doing better.

“It’s probably not time to sell yet,” Zimmermann said. “But when the bubble bursts, it’s never a slow leak.”

Like walking on thin ice, convenience retailers have get out when they start seeing signs of selloffs, he said. One such an indicator is when the market moves from high-risk investments to more secure buys.

The cause of much of this looming instability, according to Zimmermann, is the Federal Reserve. Pointing out that it was created 100 years ago for the benefit of the banking class, he said the Federal Reserve has shown its colors time and again by propping up the banks back in the late 2000s and by its purchase of bad mortgages held by the banks in the years that followed. These types of actions, including its actions to fuel lower interest rates, run counter to what’s actually good for the nation’s economy.

Through its “quantitative easing,” Zimmermann said, the Fed has bought trillions of dollars in bonds to lower interest rates, hoping to push people out of bonds and into the stock market.

“Its goal is to prevent banks from collapsing and drive the stock market higher,” he said. “All this money being forced out of bonds by these ridiculously low interest rates have been pouring into short-term speculation, and this has led us to the ‘golden age’ of the speculative bubble.”

Presenting a chart displaying the lead-up to the dot-com bubble and other similar economic collapses, he showed what potentially could be “a new batch of bubbles being inflated and going to burst.”

“You cannot pour trillions of dollars of easy credit into the market and not have this happen,” he said.

Pointing Fingers

And the Fed’s leaders are to blame, he said. Past chairmen of the Federal Reserve were oblivious to impending collapses because they clung to “failed theories and broken models,” Zimmermann said. Alan Greenspan believed that the NASDAQ bubble was a sign of increased productivity; then, he said, Greenspan overlooked the recent housing bubble because “everyone needs a place to live.” But “anyone looking at a housing chart could see the rise in unaffordability,” he said.

Then Zimmermann pointed to Ben Bernanke, who he felt “was caught flatfooted” by the latest commodities bubble.

One of the best signs that the current bubble in the stock market exists is that Greenspan, Bernanke and today’s chairperson, Janet Yellen, “all agree it’s not a bubble. Can you wish for a more dramatic verification?”

Even bad news in this environment is good news, Zimmermann said, because it’ll force the Fed to continue to postpone raising interest rates.

Those touting the eventual collapse are also prolonging the inevitable, advising people to stay in the game. “They’re basically saying, ‘I’m smart enough to get out in time,’ ” Zimmermann said. “But not everyone will get out in time.”


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