<< Read Part I: Interview With Uncle Sam 

Interviewer

So as I was asking, what do you think lies ahead?

Uncle Sam

Whoa Sonny! Where do I start? Well let's look at what is happening in this dang stock market everyone seems to be talking about. We got off to a bad start and then the thing took off again!  I remember back when I was a younger man, he he, in 1999 that we got off to a great start too. That was the year when everything changed in 2000 and markets went kaput! Oh dear and in 2008, whoa, I hope I don't have to through that again.

Interviewer

You think 2008 could happen again?

Uncle Sam

Well let me put it this way. The stock markets made highs in 2000 and then again in 2007. In both cases they then fell pretty sharply. After 2007 we had that financial crisis thing. But I saw a chart once that really caught my eye. What if we had a chart of stock prices but instead of labeling the price in dollars we did it in terms of gold. That chart was quite a revelation. It shows the stock market in a downward trend all the way back to 2000! Yet to most it seems like the market is above 2000 and 2007.Made me scratch my head and I have way too many gray hairs to keep doing that. (Uncle Sam belts out a laugh)

Interviewer

With all due respect Sir.We don't use gold to price things

Uncle Sam

Heck I know that! But you gotta ask yourself, why it would be so different - pricing in gold and pricing in dollars. Then it made me think that our "money" does not hold its value too well. Something else which was money was doing a better job. That also told me that folks are really complacent. Common everyday folk and the professionals are acting like that is not a problem. I read the other day someone talking about 115,000 in the Dow like it was nothing.

Interviewer

What do you mean by complacent?

Uncle Sam

Well for one, this market has gone up but the widespread interest (volume in the S&P 500) has been in a downtrend. That tells me there is not the same conviction in this rise. Remember the big banks that were gonna cause financial Armageddon? We keep hearing about how much more sound the big banks are. Son, have you been watching Deutsche Bank lately? And financial advisers and the like are as optimistic as ever. When everyone is so optimistic, it makes me nervous. It's that old herding instinct. Usually when there is so much optimism, there are less people on the other side of the equation that are ready to buy. To some degree, it's almost as if the crisis of 2008 never happened.

Interviewer

But Uncle Sam don't you think there is more optimism because the Fed said they were just gonna keep buying things to the tune of like $1 trillion dollars in a year's time? Oh and what about that central banker in Europe, who said they would do whatever it takes?

Uncle Sam

Is it THAT easy Mister? Can the Fed just decide to buy a bunch of stuff whether it's mortgages or government paper and just make our problems go away? Where do you think the Fed gets its money to do this stuff?

Interviewer (mouth wide open)

Ahh...hmmm...well.

Uncle Sam

I thought you might say that. The Fed's balance sheet (stuff they own) is like $4 trillion plus and most of it has been acquired in the last few years after our financial crisis. Where did they get that money? This is where it gets truly magical.Well they just credited an account and viola, they created the money. So you see, it's not as if they had the money in the first place. They can just create it. They have been buying a bunch of government debt which indirectly helps keep interest rates down on longer term paper. They are also buying up mortgages to help keep the housing market afloat. Many have called these Fed actions "inflationary" and by definition they are since they are just creating money. But, and this is an important "but", despite all this money creation we are not experiencing a raging inflation (prices going to the moon) like some expected (think Zimbabwe or Germany). Now these funny central bankers cheer when folks get less money back than they put into something in a bank or government security.

Interviewer

Great point ma'am. What does that mean then?

Uncle Sam

It means that the Fed and government and others are trying real hard to fight deflation. Creating a bunch of money (mostly in electronic form) does make for what an author called "credit cones". The money flows to these cones and makes for speculative bubbles. We saw bubbles in oil (highs in 2008), housing (highs in 2006), precious metals (highs in 2011) and the stock market (2000, 2007, and now). The bubble eventually bursts. Our bubbles are at much greater risk since we have been creating all this money (electronic forms) for a generation. The bubble in the stock market right now is truly something to behold.

Interviewer

Uncle Sam, thanks for taking the time to talk to me. I must say this interview went in a different direction!

Uncle Sam

Well son, I have seen these things happen before. I am a very old man now. I'm 240 now. I am afraid that our Wizards in government and the Fed don't really have control like they think. It will be important for my people to be in good position to be more self-sufficient in the future and rely less on these institutions. Those venerable institutions will be scrambling as well. People will come asking Uncle Sam for help, but honestly son, I'm not gonna really be of much help.