When Will The Bubble Burst?
American investors have been sitting on various financial bubbles since the mid 1800’s. In fact ever since someone decided to sell shares in their companies to raise funds. We’ve experienced recessions, depressions, housing slumps, gas lines, currency devaluation and more over the past 150 years.
One doesn’t need a crystal ball to know that history will certainly repeat itself. This recent quote from Bloomberg is very telling:
“While economists are more concerned with inadequate growth, there’s reason for vigilance. Thanks to low borrowing costs, U.S. companies have issued $241 billion in junk bonds this year, more than twice the amount during the same period in 2007; investors’ use of borrowed money to buy stocks is up about one-third in the past year to a near record, and housing prices are surging in areas such as Las Vegas and Phoenix.”
The sixty-four dollar question is, “what will trigger the next financial event?”
Our current situation started partly because of “subprime home loans.” Housing has been all over the place in recent months and it would be difficult for the economy to recover without a robust housing market. But the confidence while improving still has a long way to go before the banks jump in with both feet again. Rumors of Freddie and Fanny going away don’t help to instill confidence in the financial districts.
Student loans are another big bubble that has grown past the trillion-dollar mark and shows little signs of slowing down. Defaults are up and collections are down. More students are defaulting than graduating. Congress OK’d an interest rate reduction that should keep the trough open for the time being. How long is anyone’s guess. It’s definitely one of the more fragile bubbles with big bucks tied to it.
Commercial real estate, in part, caused over 1,000 savings and loans to go belly up in the 1980’s. Today, companies that might otherwise be expanding and hiring, are sitting on blankets of cash on the beach like the Jaws movie. Everyone is afraid to go back in the water. Companies are going to have to see significant gains in the GDP over at least 3 or more years before loosening those purse strings.
You can’t ignore Obamacare. Half of the mandates the law calls for have not been met. Other parts have been pushed out to later dates. With a little over a month left before open enrollment begins companies are cutting hours, cutting pay and reducing costs in any way they can to make sure they have financial stability when the rollout occurs. Definitely a bubble that may pop over a long period of time.
The National Debt
In case you missed the date on the deb clock picture above, that was taken in 2008. That’s just five short years ago and the national debt has nearly doubled in that time. That pretty unprecedented when you are talking about debt in terms of trillions of dollars.
Fortunately the debt is not the most serious bubble we have. Our economy is more than adequate to handle the interest on our debt. But the Fed chair can’t continue to pump billions into the system each month forever. We’ve already seen markets tanking just on rumors of cutting back that practice.
Some Final Thoughts
Unfortunately I see things getting worse before they get better. At the beginning of the year I predicted a market rise then a free fall for at least two years. I don’t want to be right. But, as more and more problem areas pop up, the crystal ball gets much cloudier. Unemployment shows no signs of reduction; food stamps numbers are way too high for our economy. Fifteen thousand “baby boomers” are going to be retiring every single day for the next ten years and they will begin draining their pensions and retirement plans. Will they spend that money or sit on it and hope for signs of a better future?
As you can see there are many bubbles and the needles are getting dangerously close. I may not sound positive but I am optimistic that this country can self-correct these problems. It took Carter to get Reagan and it will take another great leader to bring us back to greatness. When the bubble does pop, and they always do, lets hope we’ve done our job and put the right people in place to deal with it. Which bubble scares you?