Where would the next bubble be? This has become a frequent go-to-question in the last couple of years. Call it paranoia or being prepared, we are not completely out of the repercussions of one bubble-burst cycle before there is speculation of the next. Or have we become so inured that from a growth, expansion and recovery cycle, the economy has now moved to a Boom and Bust cycle!
So today I happened to catch a discussion on CNN about what the next Bubble to rock the economy would be, and decided to bring the speculation to WSO. So let’s..
What is your “pet” Bubble?
Junk Bonds? Student Loans? Higher Education? Alternative Energy?
On a serious note, Student loans reached precarious levels last year when the Consumer Financial Protection Bureau reported outstanding loans of $1T - exceeding credit card debt- and increasing delinquency rates. Considering that we are still in a recovery phase, I do not think there would be a sudden crash with liquidity forced shut for new lending, No. But I do believe that this next bubble will be a long drawn out consequence of high debt-low post college pay scenario and years of tightening of wallets as a result.
While the Government has stepped in to implement debt forgiveness and Income Based Repayment policies, these are certainly not answers for rising tuition costs. Moreover, when we consider that $36 billion in student debt is still held by people over 60-years old(according to a Washington Post data), the Government’s actions have to be deemed as too little too late.
What do you think? Where do you see the next bubble building up?
I would not be surprised to see some sort of bailout of existing student debt in the next few years and significant changes to the govt underwriting practices on future student lending
Education is, and has been the obvious choice for years now. I think tech 2.0 (i.e. FB, and all this other social media shit) could be another.
Edit: couldn't one argue that equities across the board are currently a bubble, considering theyre simply being filled with hot air by QE and fiat money?
Student loan is just an ABS problem.
It is what it is....but if it can burst, it's a bubble. lol. You don't need to know too much about securitizations to know that their value will take a shit if the underlying CFs stop. When people take out loans with the expectation to pay them down with the job that will be oh so conveniently waiting for them at graduation, and they graduate to realize it isn't there.....
I wouldn't say equities are a bubble, but there's about to be a serious pullback soon.
Student loan is my top choice. VC investments is a bubble, but I don't see it as having broad economic implications if it were to burst. Chinese real estate speculation is my dark horse.
Oh, and the elephant in the room: U.S. Treasuries.
The bubble is definitely in government debt. Yet I don't see it bursting entirely for quite some time. However even slight cut backs to government spending could plunge us into recession. As seen by the latest GDP numbers sequestration could have a major impact on the economy.
This is the exact reason it is not a "bubble". As long as the Fed can print money, US rates will be low until they signal otherwise. As you point out, it is extremely unlikely that will happen anytime soon. In the meantime, there is a fundamental reason for US rates being low.
my 2 cents: -Don't really see the argument for a bubble in high yield credit. Default rates are falling, the economy is getting healthier and spreads are not at extremely tight levels historically. Obviously, there are areas where this does not hold true, but as a whole I don't think we can call it a bubble. -Could see some of the common in some tech companies take a nosedive, but I think as a whole the industry will continue to make a lot of money so don't think it's a systemic problem. -I think there could be some issues in oil, especially offshore (production, equipment and services) coming up. The shale play is huge internationally and makes more sense for producers than offshore in my opinion (easier to control output, capex and shale oil is abundant in politically stable areas which is quite the opposite when it comes to offshore oil).
Time will tell.
Junk Bonds- Pricing yes, defaults no
Student Loans- No but is a huge drag on the macro outlook, perhaps most notably housing.
Higher Education- Absolutely!! Huge Bubble and I believe in the coming decades we'll see more and more people going to vocational schools as more and more students look back at the tough times our 20 somethings are going through today.
Alternative Energy- Certainly was a bubble, but most of the excess has been flushed out over the past couple years. When European countries cut feed-in-tariffs most of the uneconomical technologies perished. Remaining are industry leaders like First Solar and Asian companies that are still subsidized by their governments. I don't all that much about the industry, but companies have done an outstanding job lowering prices year after year in the PV panel market. Some of the other energy sources seem much more speculative. It seems like at some point in most of our lifetimes we'll see grid parity. Still nothing, including natural gas, comes close to the EROI that oil produces (Approximately 15 I believe compared to 3 or so for natural gas). The gap is definitely closing though.
Equities- Obviously there is huge downside risk with global economic uncertainty. However I would not call it a bubble. Multiples are actually low for being in such a low interest rate environment. There is a strong inverse relationship between interest rates and earnings multiples (If the risk free rate was at 20% a PE parity would be 5, of course risk premiums and growth would be calculated to create an appropriate multiple). One could argue that interest rates are in a bubble and I think that would be a fair argument but haven't we all learned by now to never fight the fed?? That being said I'm 50% in cash right now because I do see a moderately low probability of economic chaos and I see a larger probability of positive but small returns. I just don't think a 75% chance of a say 6-8% return warrants being fully invested when there is a 25% chance of the market dropping 30-50%. It's also nerve-wrecking to see bell weathers continue to miss on the top line.
Govt. Debt- I actually don't believe it is that much of a problem in the next decade. People constantly look at debt-to-gdp as the best gauge of a countries debt load. Some for of interest coverage would be more appropriate. Aren't tax receipts to interest something in the ball park of 5-6 times? Obviously something to be concerned about, but no reason to panic for now. Yes I know that refinancing the debt at higher rates will be an issue down the road, but I think we will still have plenty of time. I once looked at a chart of historic govt. debt and gdp and what was fascinating to me was that we have never made a huge effort to pay down the national debt. Post WWII there was some very very minor debt reduction for a couple years (it was sporadically and generally around 1-2% if I remember correctly). Everyone pointing to the Debt-to-GDP falling from over 100% to around 50% by 1960 often does not mention that the reason for this was solely due to large increases in GDP. We face different issues today and the projections of growing deficits are bothersome but I think a lot of it is blown out of proportion.
China- I am in the camp that believes China is in a huge bubble. I really don't believe they will be an economic power until there create a consumer economy. Consumption makes up around 30% of their GDP (although their GDP itself is questionable) and they have a government that seems to be in no hurry to change any of this. Everyone knows about the personal property issues they have, but no one seems to care. Despite what fools like Peter Schiff say, consumption is what makes an economy. The US has always been around 60%, though more recently trended up to 70%. I don't see China getting anywhere close to this any time soon. All bulls seem to care about is the size of their population! 1.3 billion is a lot but it is not like that happened instantly. They have always had a huge population. The huge growth emerging market economies have seen over the past three decades has almost nothing to do with the dynamics of their economies. It purely stems from ridiculously cheap labor. Those easy gains are about to run out and their leaders are resistant to change. Their economy is ridiculously bifurcated with GDP per capita ranging from $20M USD in large cities to $1M USD in rural areas. The vast majority of their population lives in these rural areas. In fact I believe I saw a figure that 30 million Chinese lives in caves (seriously). Everyone has heard Jim Chanos and his worries on their banks debt issues (he's totally right). Everyone has seen the fraud after fraud that Muddy Waters has revealed. Everyone has seen one ghost city after another on youtube. Everyone knows about the nets at Foxconn factories to prevent suicides. But most investors could care less and just that fledgling middle class. For now China is the last place I would want to invest. I think investors are a little to optimistic on all the BRIC's. However, the response from Brazil, Russia and India have been much better than China. I think the real issue is that expansionary growth is much easier to identify than innovatory growth and sadly investors are often too lazy to look for the next big thing. This may be the biggest issue for the rise of china...... the lack of innovation. Yes the United States was a manufacturing powerhouse, but also produced unparalleled innovation. Though I'm sure China has contributed something besides cheap labor, nothing really comes to the top of my head. I've never once heard a China bull address any of these concerns. I've seen probably over a hundred interviews of Jim Rogers over the last 5 years... and they are like clockwork. First of all he is always rocking a bow-tie, then he starts the interview by telling whatever hot anchorwoman who's interviewing him that he is delighted to be here, then he bashes Bernanke about QE 1,2, etc., states he is a terrible market timer, bashes the US and claims the 21st century will be the century of China. His entire premise (bullish on china and commodities) is completely based on population. His only response to any of the issues China faces is that the US faced tough times on their ascendancy too. I believe I've read all his books too and he never addresses any of the issues and those either. Wow this is way longer than I intended but yeah basically I think China is a facade.
Agreed - it seems that there's a disparity between price inflation and the relative drop in default rates that everyone is pointing to as the primary cause of the rally.
I believe tax receipts vs. interest expense is something north of 7.5-8x (more if you include ancillary revenue streams). Debt to GDP is garbage in my opinion since most figures completely disregard most obligations.
CBOE 2012 Interest Exp ~ $230Bn 2012 Gov Revenue (Only Fed Income Tax) ~ 1.8Tr
All that being said - my money is on investment grade corp debt. Spreads to treasuries for IG companies have been tightening so much that with the some of the misses in top line revenue (mentioned above) I could see these widening again. That being said - less of a burst and more of a pullback.
I'm not sure what the result is, but global monetary stimulus is going to run its course.
I believe the result could be global inflation but I am not sure.
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