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Four Ways To Not Lose Money In A Bubble Economy

Many experts claim we're not in a bubble economy because they can't see the "bubble."

Why is beyond me.

The bubble is so enormous right now that any serious bailout attempt would have to encompass the entire shootin' match or roughly $600 trillion to $1.5 quadrillion ($1,500,000,000,000,000) in order for it to work.

That's the total estimated amount of outstanding derivatives, credit default swaps and exotics outstanding at the moment according to various industry sources.

I say estimated because nobody actually knows for sure. Nearly five years into this crisis, the derivatives markets still remain almost entirely unregulated.

And, that's why the well-intentioned but completely misguided onesey-twosey's bailouts we've seen so far won't cut it despite the fact that they're already into the trillions of dollars.

I say this because, despite what most politicians and central bankers think, we are not staring at a series of independent bubbles blown into the wind, but a single, massive all-encompassing monster bubble that surrounds us all.

To put this into perspective, the total value of the United States' economy is approximately $15 trillion. The world's GDP is around $50 trillion while the total capitalization of world stock markets is only $100 trillion.

The market bubble

You can see the problem as easily as I can…there literally isn't enough money on the planet to bail us out, and I don't care who's got the keys to the printing presses.

How We Got Here is a Story in Itself

Bubbles this big don't form overnight.

What we've been handed is an overlapping bubble that's gotten progressively larger over time as our legislators, bankers and regulators have progressively "improved" the system over time.

Following World War II, we levered up approximately 10 to 1 as the U.S., Europe and Japan recovered. Then, in the 1970s, the United States moved away from the gold standard. Other nations followed, taking global leverage higher; 30 to 1 became the new standard.

Following the Asian currency crisis and the beginning of Japan's Lost Decade, things jumped to 60 to 1 as ChinIndia, the Dot.bomb boom and housing took off.

In 1999 Congress tore down Glass-Steagall with the Gramm-Leach-Bailey Act, and in the process removed many of the limits between commercial banking and securities firm affiliations.

Shortly thereafter, it passed the Commodity Futures Modernization Act in 2000 which specifically exempted credit default swaps and other exotic derivatives from reporting. That created a Wild West-like atmosphere for traders and their firms using leverage that jumped as high as 100-1.

With each progression down the slippery slope, the bubble simply grew and grew…and grew.

The market bubble

And it's not just in one market either…but in every market. I believe this is precisely what our leaders and bankers are missing. To them, the crisis appears like a bunch of independent bubbles each with its own unique set of causal factors and solutions.

Take your pick: the housing bubble, the credit bubble, the EU, China– you name it, only they're not so independent.

Figure 1:  Fitz-Gerald Research Analytics
Figure 1: Fitz-Gerald Research Analytics

The Problem with the "Smartest Guys in the Room"

So why do guys like Ben Bernanke, Paul Krugman, our Congress, the ECB, and nearly every leader in the EU except Angela Merkel like the idea of printing their way out of this mess?

Three reasons:

  • They want to get reelected and/or maintain their own power base in a dramatic demonstration of Parkinson's Law;
  • They have failed to understand the lessons from Japan's experience (and 2,000 years of recorded monetary history before that);
  • They cannot comprehend that this crisis was caused by too much money rather than too little so they won't admit what they are doing isn't working and pursue another course of action.

I've commented extensively since this crisis began about what they should be doing, so I'm not going to delve into those details again but here's a quick summary:

  • Force banks to decide…either they are commercial or investment banks. No in-betweens, no hybrids and no accounting gimmicks. Break up those who will not cooperate by legislative force if we have to. No taxpayer should be liable for their transgressions. Period.
  • Reinstate Glass-Steagall or some variation of it. Dodd-Frankenstein won't work. The system is broken so scrap it and begin anew.
  • Let failure happen. History is littered with the bones of failed financial institutions. Things may change, but finance is a process of evolution and it always has been. The key is not allowing mutants to have their run of the planet when what the public trust requires is security, integrity and honesty.
  • No netting. Enact global standards that require big banks to report the true value of their exposure. People are upset about JPMorgan's loss and have a hard time understanding how the bank's trading losses ballooned from an initial $2.1 billion figure to what's now approaching $5.8 billion…until they comprehend that Bruno Iksil, (a.k.a. the "London whale") may have had total exposure exceeding $130 billion, according to industry insiders familiar with the trade.
  • Let the markets decide how much is too much. Don't use policy instruments to play God. Some sources suggest that firms like JPMorgan may still hold hundreds of billions in trading assets that remain exposed to liquid asset markets. Assuming the world's big banks remain levered in line with historic capital ratios, a 20% correction in global markets could literally wipe them out. With the taxpayer now on the hook for downside risk, that's hardly an appealing thought.

You may have your own opinions or even disagree with mine. That's okay and expected. There are no easy solutions this time, nor is there a singular perspective.

How to Beat the Bubble Economy

But, in terms of what we do as investors, there are certainly easy choices.

First, the return of your money has to be more important than the return on your money. Period. Any investment you make has to be made with the concept of safety in mind and the preservation of value at hand.

To me this means shifting focus from what the world wants to what the world needs, particularly when it comes to energy, inflation-resistant choices, and dividend-producing stocks with high free cash flow.

Second, don't walk but run away from long-term bonds and fixed-rate investments. I know this will piss a bunch of people off, but that includes many annuities and whole life insurance at this point. Any rise in interest rates will crater the value of these instruments and subject your wealth to unnecessary volatility.

Short-term bonds and variable-rate instruments are a different story. There you have at least a limited capacity to absorb the changes that will come from rising interest rates and a changing global financial system by continually recycling into new, higher rate instruments as they become available.

Third, make sure you are equipped to "buy and manage." Buy and hold has been dead for years and is unlikely to ever return. Sadly most people don't realize this and continue to confuse it with buy and "hope."

A lot of people don't like them, but I am a big fan of trailing stops. I encourage any investor who's serious about their money to use them as a means of capturing profits and protecting their hard-saved capital from serious market hiccups. Put options are a good choice for those with a more sophisticated toolset.

And fourth, you've got to know when to step back in.

I know that sounds like a contradiction given the stage I've just set in this article, but knowing when to buy is critical in markets like those we're living through now.

Don't confuse this with market timing.

What I am suggesting is that the markets have an upward bias over time, therefore outstanding performance over time becomes a matter of identifying relative weakness and buying into it rather than running the other way.

You can see that quite clearly in charts like this one:

The market bubble

So don't give up the ghost.

Understanding the big picture as I have laid it out will help you comprehend the world we live in and how to use the mistakes policymakers are making to your advantage. It may not be easy to deal with emotionally nor pleasant to think about. But that doesn't make it any less important.

Believe it or not, the global financial crisis is actually helping us approach a point where market conditions will again favor buying more than selling, and even our policy makers won't be able to screw that up.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at

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  1. Bharat shah | July 27, 2012

    very good article..few questions A) if i hold my debt till maturity whats problem??b wher do we park liquidity??Is precious metals like Gold and silver safer bets??

  2. Bob | July 27, 2012

    Very well done Keith – the big bomb is what's been scaring me for the last 7 years. Breaking down the solutions – much of which is simply reversing failed regulatory changes is spot on – even Sandy Weil agrees. Read a great piece awhile back which in addition to repeal of Glas Steagall, the other catalyst for increased risk was the conversion of private investment banks into publicly owned institutions. Previously partners much more tightly managed the risks because it was their fortunes not someone else's at risk. Not sure how that can be reversed but your point to expose the exposures as well as limit the amount of someone elses money (especially taxpayers') is spot on. And of course some well placed and adjudicated criminal charges would go a long way towards reigning in reckless behavior – not to speak of reinstilling some confidence in our sadly tarnished markets

  3. fallingman | July 27, 2012

    Good article. Thanks.

    Just a couple of quick observations. I see so many people who seem to feel…and I'm not including you in this pool…that simply re-enacting Glass-Steagall would magically fix things, It would be some kind of panacea.

    The horse is already out of the barn. G-S may help prevent the situation from getting any worse, but that big red bomb on your table is there and it ain't gonna just disappear because commercial banks are prevented from engaging in "investment" banking/wildy leveraged speculation going forward.

    The market current enjoys a stable disequilibrium. When the disequilibrium becomes unstable, the whole thing avalanches. If it would wipe out JPM, not to mention Goldman and BofA, it might be worth living through it. Gotta clean out the "mutants."

    The third perpetrator's name was Bliley, not Bailey. And let's never forget that Robert Rubin was the driving force behind scrapping Glass-Steagall, along with his fellow travelers, Phil and Wendy Gramm.

  4. PHIL@STEINSCHNEIDER.COM | July 27, 2012

    Mr. Fitz-Gerald,

    This is one of the best and most salient articles outlining our current condition that I've ever read. It's uncomplicated and to the point.

    On the other hand (There has to be one of those, doesn't there?), if central banks stand back and do nothing, we'll probably see the biggest deflationary collapse in the history of mankind.

    Frankly, I think it's likely we'll see central banks continue to do what they're doing until we experience a combined hyperdeflationary and hyperinflationary disintegration.

    When interest rates are forced to rise, and liquidity rushes out of interest rate-sensitive instruments into commodities and other tangibles, credit assets could very quickly become valueless while things that require productive effort to produce become priceless.

    I think that as these deflating assets are sold, the initial effect will be a huge increase in the value of currencies that can be used to settle these sales. In response to this, central banks will rush in with liquidity, which will then push all of those assets into tangibles (e.g., precious metals, collectables, everyday consumables, land, real estate).

    The above scenarios should have played out in 2008, but the sovereigns were not yet quite bankrupt. Now that both the banks and the sovereigns are hypersensitive to interest rates—which has masked their true financial condition—everything is in place for the simultaneous hyperdeflationary and hyperinflationary collapse to take place.

    It's going to be fascinating to see how this all plays out. But more interestingly is the question of when this will actually happen—tomorrow, next week, next year, or at some point even further out. Regardless, something wicked this way comes.

  5. cecil stralow | July 27, 2012

    Why do all these articles have to ramble on and on? Cut to the chase!!!!

  6. H. Craig Bradley | July 27, 2012


    Ah, Keith- the world's central bankers may not be "missing" all this but our politicans sure won't ever "get it" either. They won't change or cut back on real spending , no matter who is elected. Bankers are all to happy to lend to spendthrift sovereigns ( Greece, Spain, Portugal, Italy, etc.)

    Central Banks Around the World were net sellers of gold from 1999-2002. Gold hit bottom and the breaking point for South African gold producers. These sovereigns were heavily in debt and laying off thousands of miners. South Africa sold 323,000 hectares of forest to raise $ to pay debts and stay afloat. The same central bankers made deals and bought their gold mines.

    Now they have most of the gold and the mines too! Ten years ago they started buying back all the gold they sold. What do you these bankers are ultimately after? A global scheme of new "funny money" controlled by you know who? Everyone will be indebted to them. Who calls the shots then? Sure not the President.

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