Bubbles are Bursting

Which bubble has burst and which bubble are we in?

Internet Bubble? – Burst
Housing Bubble? – Burst
Credit Bubble? – Burst
Oil Bubble? – TBD
Gold Bubble? – TBD

Investment bubbles arise from over enthusiasm in a market. It leads to irrational values.

So lets review the list above.

The Internet Bubble had tremendous staying power. The start of the market run up, because of tech stocks, started around 1995 and really picked up steam in 1998 before leveling off in 2000 and then bursting in 2001. I blame advertisers as much as I blame investors or the technology itself. I can remember cell phone commercials that promised movies and the internet on your phone at warp speed years before even the service was offered. Since everything was shiny and new the possibilities were endless, but that is all they were.

The Housing Bubble started as a result of the bursting of the internet bubble. To spur economic growth the Federal Reserved reduced the interest rate to record lows. Everyone was either buying a home, a second home, or refinancing their current homes. And why not, this was the ultimate sale of sales. So home builders got on board and started churning out new homes. Why buy an old home when you can get a cheaper new one? But what goes along with home building is the sale of materials – bricks, wood, tile, and paint for example. All these items have small businesses associated with them. This bubble burst primarily because the Adjustable Rate Mortgages (ARMs) all adjusted up after their grace period. What is strange is that the mortgage is still comparatively really cheap. But the home owner didn’t budget appropriately and now can’t make payments to the bank. This forces the bank to foreclose and add back to the market another house at a discount (because the bank wants its money back). All these homes on the market with people who can’t afford their current house creates a glut.

The Credit Bubble is tied to the Housing Bubble. As people started defaulting on their loans the value of those loans sunk for obvious reasons. But banks had started a practice of packaging these loans together and selling them to each other for different reasons. Since the banks had assumed all this risk they are now less likely to offer credit because of the losses they are already feeling from both the mortgage loss themselves as well as the value of the packaged loans. They packages are now like the homes – worth less than bought for. An asset the bank was using to borrow against is now pretty worthless, so a bank getting a loan is more difficult because it has less value to leverage against.

The Oil Bubble hasn’t burst yet, but it is tied to the two previous bubbles as well. The price for a barrel of oil is the highest it has ever been, even adjusted for inflation. It is mainly a supply and demand issue. The US is increasing its consumption of oil on a regular clip and now emerging economies like China, India, and eastern europe are using more oil than they had in the recent past. But these emerging economies are underpinned by American consumer buying stuff. It could be manufactured toys, clothes, or sneakers. It could be information technology services. Or it could be tourism. It is true that each of these areas has local economies and consumers, but the US is still the biggest driver. So what happens when the US consumer stops buying? If the US goes into a recession or something looking like a recession then the US consumer will not buy as much stuff and eventually that will effect the plants in China, the offices in India, and the resorts in eastern Europe. If these locales don’t have income coming in they will stop buying items that require oil. Supply will go back up as demand, and political panic sets in. This bubble is probably six months from bursting. People need to recognize that oil shouldn’t cost this much.

The Gold Bubble is a direct result of the foundation of the US economy. People buy gold because it will be worth something even with the green back isn’t. At one point in tme US currency was backed by gold, but that isn’t true anymore. The US economy is now backed by markets only. And lately the view of the US economy is that it is hurting. I expect the gold bubble to burst within four months. I think the US is currently at its worst right now. Value investors will start selling their gold options for a profit in the May time frame. It is possible that the end of August can cause a relapse in the US economy, but it should rebound slowly, and without jobs, by June.

So this is my review and prediction for the week. No one will pay attention if I’m wrong, and if I’m right then I’m sure to tell about it.


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