12 Economic Bubbles That May Burst

Discussion in 'Wall St. News' started by Stewenson133, Aug 14, 2009.

  1. http://www.businesspundit.com/12-economic-bubbles-that-may-burst/

    1. Gun sales

    Anticipating anti-gun legislation, certain Americans are snapping up guns to hoard, collect, or safekeep. Some are even stockpiling for investment purposes.

    According a gun buyer mentioned in this Wall Street Journal article, a collection of “assault weapons” could triple in value if the federal government re-enacts a ban on their sale. Background checks on potential gun buyers increased by 27% in the past year, according to the article.

    Some guns have already appreciated. For example, European-made AK-47s doubled in price between September-December 2008. For savvy buyers, the right to bear arms is also bearing fruit. The question is: When’s this bubble going to burst?

    2. Option ARMs

    Starting in May 2009, option adjustable rate mortgages (ARMs) have been causing “more delinquencies and foreclosures than subprime mortgages,” according to a Wall Street Journal article written in July.

    Option ARMs allow homeowners to pay partial interest on their home loans for a predetermined period of time. In some cases, the unpaid amount of interest is added to the loan’s principal. Once the partial interest window expired, homeowners are left with potentially unaffordable payments.

    Combine that will falling property values, and you see yet another loan-inspired disaster. According to the Wall Street Journal,

    As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure.

    Option ARMs are concentrated in California, Florida, and other hard-hit housing regions, writes the WSJ. Wells Fargo, J.P. Morgan Chase, and the FDIC’s insurance fund hold a large proportion of option ARMs, so a burst bubble will hit them especially hard.

    It’s just a matter of time.

    3. Cap & Trade

    In September, the Senate will vote on the American Clean Energy and Security Act, which should really be called the Clean Energy Securitization Act. The act will create a cap-and-trade market that will create new derivative-friendly asset classes, according to this Christian Science Monitor article.

    The government will, if the act passes, activate a market for carbon allowances and carbon offsets. The former are permits allowing companies to pollute; the latter, pollution permits that require companies to offset their carbon emissions elsewhere.

    That, writes Mother Jones reporter Rachel Morris, is just the beginning. Once permits hit the market, financial experts will convert them in derivatives with names like “offset futures” and “allowance swaps.”

    Bubblemania will ensue if the government shies away from regulation and enables the same kind of chaotic, over-the-counter system that enabled the mortgage-backed securities crisis.

    The financial industry is currently lobbying for minimal regulation. If the bill goes through in September, and the government steps back from applying regulation, subprime carbon might not be too far away.

    4. Incandescent Light Bulbs (EU)

    A pending EU-wide ban on incandescent (traditional) light bulbs is causing consumers to hoard the soon-to-be unlawful products. Manufacturers are enjoying massive sales as a result.

    The Spiegel article covering this bright bubble news didn’t mention anything about people hoarding for investment purposes, as they are for guns, but that certainly remains an option. The bubble will burst in September, when stores no longer sell incandescent lighting, and it will really burst when CFL (compact fluorescent lightbulb) technology improves enough to make people toss out their old incandescent.

    5. China

    Chinese stock markets have been surging, fed by easy credit from government-linked banks. The Shanghai Composite rose 16% in July alone. Banks extended $1.1 trillion in new loans during the first six months of 2009.

    What’s more, a Chinese company enjoyed the biggest global IPO of the year. China State Construction Engineering Corp. raised $7.3bn in one day. The Shanghai Composite Index dropped 5% as a result: Investors feared that the same speculation that had increased CSCEC’s stock value by 56% was also overheating the market.

    Unfortunately, China’s economy remains export-driven. The numbers are a smokescreen. The Chinese government is powerful enough to “make the right numbers appear” if it thinks the country’s economy needs stimulating, according to Contrarian Edge’s Vitaliy Katsenelson. “(T)he government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system restabilizes,” he says.

    China is experiencing “asset bubbles that look like economic growth,” writes Bloomberg’s William Pesek. Will China’s market manipulation survive the recession, as the government has planned, or will the bubbles all burst?

    6. Gold

    To many investors, “quantitative easing” is synonymous with “buy gold as fast as you can!”

    The problem is that more money in the mint doesn’t necessarily mean inflation. What if the Fed printed less money than was lost in the financial crisis? What if consumer demand remains low and producers can’t increase their prices? Or if, after banks recapitalize, there isn’t any extra money left? Or electronic money messes up the whole notion of quantitative easing?

    Gold will spike when in inflation hits, but if there’s no inflation, speculators will be left empty-handed. Then again, if–as some goldbugs claim–the dollar weakens further, global financial systems collapse, and governments fail, it’ll be nice to have some bullion on hand.

    7. Higher Education

    Elite schools like Harvard and Yale have frozen some faculty salaries. What gives? It’s a widespread endowment dry-up, according to The New York Times’ Steven M. Davidoff. He explains that in recent years, endowments and tuition hikes have enabled universities to expand buildings, programs, and faculty, as well as increase salaries.

    With the economic crash, however, endowments have shriveled. The Harvard endowment, on which certain parts of the university heavily rely, used to enjoy handsome portfolio returns: Its private equity portfolio gained 28% during the past decade. Now, it is facing more than 30% losses, according to Davidoff’s calculations. He estimates that up to 40% of Harvard’s assets are illiquid, meaning that it will have to aggressively raise donations or increase its liquid returns to fund itself and its private equity obligations.

    “This results in a spiraling decline in Harvard’s liquid assets as each year they go lower to meet these needs and more and more assets become tied up in private equity,” writes Davidoff. Ouch. Overdependence on endowments and private equity is bursting the higher education bubble, especially at the top tiers.

    8. Trustafarianism

    Bubbles can be cultural, too. Just ask the hipsters featured in this New York Times article, who freeze in shock after being informed that full-time jobs last eight hours a day. For many, the parental bailout is a bubble that has either deflated or burst.

    9. Alternative Energy

    The next decade marks the rising of a Brave Green World. Governments are limiting carbon emissions and pushing large alternative energy subsidies. Peak oil makes the search for alternative energy sources more pressing. Cap-and-trade, if it passes, will create a new market for energy-related derivatives, enabling speculation and asset price inflation.

    “There must be significant government involvement designed to focus energy and capital on the specific industry — and clearly that’s already happening,” writes Jeff Brady in this NPR article.

    A few pieces still have to fall in place for a bubble to form. These include a massive update of the national energy grid, as well as a new source of credit for green ventures, according to Brady. He says that a grid update is in the works. A new source of credit, in my opinion, is just a matter of time. When that happens, brace yourself for the green market overvaluation—err, revolution.

    10. Junk Bonds

    In late July, average junk bond yields fell into the single digits for the first time in more than a year, according to the LA Times’ Tom Petruno. The KDP Investment Advisors’ index, which covers 100 junk issues, hit a high of nearly 18% returns last December, Petruno reports. Record bond defaults haven’t deterred investors from loading up on the risky bonds, but they have returns on their sides. Petruno says that “the average junk fund is up 27.2%.”

    Those returns out-entice the prospect of massive defaults, which are bound to occur eventually. 42% of junk bond issuers have “highly leveraged balance sheets—much more than in previous years,” according to this CNNMoney article. It’s a good time to be in junk bonds—if you can get out before the bubble bursts.

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    7) Education.....Needs to become internet based....and available to the willing.....not just to the rich and connected....
    The cost should be miniscule.....

    9) Alt Energy....Should enter the market because of price....When the "green price" is right....ok....

    10) Junk bonds, gold, short dollar.....just more crowded trades....
    The "public" never gets rich....just a few individuals....this is never going to change....
  3. I wouldnt say the public never get's rich.

    You know any stocks out there that hasnt gone up at least 100% in 09?

    Lot's of retail investors caught that move.

    The tricky part is knowing when to get of the train...

    That's the crux.
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    Rich means "rich".....

    ie BAC now wants to offer commodity products to all of its customers because "things that are real" are in vogue....

    The "public" never gets rich by "market rule"....

    ie there will never be 200 million Warren Buffetts....


    Secondly....not many participated in the recent big win....
    The psychology during the time of duress was extremely negative....

    The public was not buying at the bottom ....they were suffering and puking....Very few bought the bottom....

    ie One is just reading now....Paulson participated etc....

    The "masses" never have or will get rich....not ever....

    Who knows....maybe Obama will make the "public" rich....
  5. Secondly....not many participated in the recent big win....
    The psychology during the time of duress was extremely negative....

    The public was not buying at the bottom ....they were suffering and puking....Very few bought the bottom....


    My take.

    Some did nothing, just riding it out neither buying or selling

    Some bought on the way down and they are underwater.

    Some who did buy around the bottom overtraded.
  6. rich is relative. Today with flushing toilets, fridges, cars, heated homes, we live better than kings 100 years ago.

    But debt will be a problem. The public will always be in debt is more apt. Or the public will always fall behind in their finances is true too.
  7. someone wrote ' bubbles are the new bubble'...
  8. BBY - Best Buy.
    What a POS.
    I shorted it in April and am still making money.

    Retail investors who 'caught' the move, as in weren't down 60% before it happened, are few and far between.
  9. Since the indexes are up a lot less than 100% in that time, I would say "most stocks."