Is this liquidity bubble going to burst? It’s not a question of if- but when. But unlike other bubbles there is no defined direction to the potential explosion that will occur when this potential cash infusion decides to move. Unlike traditional bubbles that are built with a defined upward direction, and a logical downward direction, a cash bubble does not have direction. Maybe true to the metaphor when this bubble pops trying to capture any of its parts will truly be futile.
Humans are the investors- unfortunately we all succumb to myopia and emotion. The long term ideals that we often state as investors lose their respective value when the short term movement of our investments doesn’t comply. Have we been coaxed into a false sense of security? Are the market and the entire financial system on the brink of potential collapse again? Collapse is the only constant- In an article by Niall Ferguson he refers to the first shares traded on the first exchange 400 years ago. The history has translated to a long succession of financial bubbles that have always burst.
“The fed is ready to party” Those comments while appropriate for today’s actions where muttered by a novice news commentator in 1987. He was referring to the novice federal reserve chairman Alan Greenspan who boldly stated the feds commitment to “serve as a source of liquidity to support the economic system” Now those words have an eerily echo of repetitive truth. The question is- How unstable is the underlying financial system that is being supported by the fed and government stimulus? To use a portion of the quote from Keynes’s “Can the federal reserve remain solvent longer than the markets can stay irrational?”