Bill Bonner from Italy. Air is going somewhere else

From the Financial Times comes the view from the sunny side of the street:



“The optimistic view is based on two distinct elements. First, that the deleveraging process is reaching its natural end as valuations stabilise and institutions come clean about their losses and raise capital; second, that a series of previously unthinkable policy responses have been effective in restoring liquidity to the financial system.



“Both views have merit. Financial institutions, particularly in the US, have recognised the scale of the problem and are taking remedial steps. Just witness the recent round of capital raising by Citigroup, Merrill Lynch, JPMorgan and Wachovia . At the same time central banks in Europe and the US have opened up their financing windows, expanding the size of the financing, the range of institutions that can access it and the list of eligible collateral.”



The report goes on to suggest the alternative...that policy reactions (by the Fed and other central banks) may be “too little, too late.”



And here, we think the writer is wrong on both scores. That is, the real problem is not one that can be fixed by putting more money into the banking system. It’s more basic than that. When a bubble pops, it’s almost impossible to pump it up again. You pump and pump...but the air goes somewhere else. The consequence of the dot.com bubble, for example, was that expectations for the new age of computerized communications were over-bought. New money could be put into the system. But the new money didn’t go into dot.coms. It went into housing and finance. Now, those bubbles have popped too. The authorities are pumping new money into the banking system...but where is it going? We already have plenty of houses in America – more than enough. Don’t expect a boom in the housing industry anytime soon. And take all those leveraged, sophisticated CDOs, MBSs, SIVs, and the rest – please! Who’s going to put more money into those?



No, dear reader, that’s not the way it works. New money looks for a new home...a new bubble to inflate...not one with a hole in it.



Our guess...and again, we warn readers that we are just guessing...is that this inflation is going into gold, commodities, oil...and, yes, emerging markets. Our guess is that the setback for emerging markets is just a correction, not a fundamental shift of direction.



Our guess is that the setback for gold – down below $900 – is also just a correction, not the end of the bull market. Indian stocks...the Vietnamese economy...commodities...gold – all still have a lot of room on the upside.



Our resident commodities guru, Kevin Kerr, couldn’t agree more. “A nasty rumor has been going around that the commodity markets are old hat and will soon go the way of the dinosaur,” says Kevin.



“‘They’ have been saying that since I started on the floor almost 20 years ago. I’m here to tell you that not only are these markets stronger and more modern than ever, but there’s never been a better time than right now for investors like you to make lifestyle-changing profits, and probably more quickly than you ever thought possible. I know, because I’ve done it myself!”









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