My impression is globally there is several trillion in capital that isn’t being invested. I know that in the US the housing recovery is in large part due to wealthy individuals buying houses with cash and renting them out to get better returns than they could get elsewhere. I don’t recall the exact number but I think about 40% of home sales are cash purchases nowadays (far more than before the recession).
Precious metals seems like it is in a boom/bust cycle, but who knows. With all this capital floating around and such low interest rates are there things people are investing in that seems like a stereotypical boom/bust type of investment? If so, does anyone know what the repercussions could be?
As far as housing, are some housing markets heating up due to all the cash purchases and going far too high in price? Even if so, does it matter (it isn’t like people who buy homes with cash will ever be unable to pay their monthly mortgage and have to foreclose).
Many in the financial industry say that there is a new tech IPO bubble in the advanced stages just before death. One of the worst signs is that lots more people are being invited into pre-IPO deals. The promise is that they can buy shares at a near guaranteed discount and unload them shortly after the IPO for a quick (and often substantial profit).
That is the way that all IPO’s work right? Not exactly. IPO shares are usually a highly coveted thing that are given to large or very influential investors and not just random people. It is a kind of scam for the general investing public on its own because most normal investors are locked out of those discounted stock prices and quick gains but that is a topic for another day. It is a bad sign when new IPO’s start offering pre-IPO shares to friends of employees and other small individual investors that have nothing to do with the company. It means that there isn’t enough large-scale interest in them to support the IPO prices in the traditional way and that bubble just may be about to pop just like it has several times before.
Tech stock valuations make no sense to me at all. Facebook valued at 91x earnings? Twitter having a market cap of 22 billion despite never making a profit? No thanks.
The fossil fuel exploration industry seems to be in a liquidity phase which is exceeding returns. The Telegraph thinks the industry is the current subprime-type risk.
Farmland here in the midwest might be heading for a bubble since its been high when corn was going for near $6 a bushel but now its barely $3 so farm land prices may drop.
This seems to be the big category.
Think of anything where people are dumping money not because they actually make money, but because they think in the future things will boom. To justify reasonable returns in future where there are not really any now, you have to promise real growth.
Facebook was the classic - it dropped within a few days to have the feeding frenzy IPO level. The argument with some f these stocks is that they have the potential to make a LOT of money; but they probably don’t. The more that facebook-type social media seem to turn your private data into ads, the more they turn off people. Netflix might have serious growth potential, but considering that it’s already pushed Blockbuster and friends out to the curb, is there really that much growth left? Amazon - how much more are you going to buy online anyway, and how badly do you need a middleman in many of these purchases?
IMHO the way bubbles work is people want to park their investment money in something promising. Others follow the trail, and others learn to sell the sizzle to further investors. The people on the receiving end of the money mistake incoming investment money for actual market growth; what appears to be riches generated by the business growing is actually the growth phase of a pyramid of investment, waiting for the point in this inadvertent pyramid scheme where the new money stops covering the necessary level of cash flow and the whole thing collapses.
From the IT perspective, we have the next phase of the IT bubble in “cloud computing”. Instead of owning your own hardware, move your MS office, your email, your accounting systems, your phone system, your entire company software infrastructure to the “cloud”. It all runs in a computer farm run by a major provider, and backups, upgrades, capacity, etc. are someone else’s problem. You’ll hear more and more about this until the downside hits some big players like a brick wall - imagine your company’s entire computing capability goes down one day because of a careless upgrade (remember Blackberry’s last year’s messaging troubles? Multiply that by 100).
Companies will jump on the bandwagon because replacing their hardware in a 5-year cycle to stay current is expensive, replacing or upgrading their software to stay current is expensive. They think they’ll save money, they are only signing up for a different set of problems. Meanwhile, the companies signing them up will show incredible growth (easy when you start from almost zero) and promise unrealistic growth, attract investment, and grossly overexpand on optimistic projections.
There may also be a bubble in Government bonds. I say maybe because I have come to the conclusion that economists know relatively little about their area of expertise.
There’s a lot more wrong with it than that. The analysis is superficial, at best, and nonsensical at worst. Concerns about inflation destroying people not in the market is silly and attributing the 2008 crash to inflated market pricing is also silly. Yes, some things were inflated in 2007 - as the link says - but the crash was caused by other factors and was a byblow symptom, not a net cause of the recession. The housing bubble did that, not inflated equities.
It’s not just a few areas, such as cars or housing…
The entire financial system is now one big bubble.
Here’s the analysis from an economist who I respect because, back in 2007, he wrote dozens of articles explaining in layman’s language what derivatives were , and how they might cause entire banks to fail.
Nobody who doesn’t have a pension today is likely to ever get one, but plenty of people have what you might call “legacy” pension plans. Or they will, until the bubbles burst and the pension funds are wiped out.
I have a sneaking suspicion that by the time I reach retirement age, “retirement” will be something only the wealthy can afford to do.
Add Tesla to that list. Their fundamentals are awful: They’ve managed to eek out a profit recently, but that’s based entirely on the generous tax credits they receive. On an operating basis, they’ve never made a dime. BMW is working on a car that is specifically designed as a “Tesla-killer,” and anyway, there are signs that the North American market for EVs might be approaching saturation. Tesla’s plans for a cheaper (~$35,000) car will almost certainly make Tesla’s dodgy profitability worse, not better. General Motors makes a similar car (the Volt) as does Nissan (the Leaf) and both companies lose money on those cars.
Yet, despite all of those headwinds, Tesla’s stock trades for $220/share. It makes no sense.
Elon Musk’s other company, Solar City, has outright admitted that when its tax credits expire in a few year, the company will become unprofitable, but its stock is currently trading at ~$70/share. Clearly, we are dealing with a “greatest fool” scenario here, where the people owning the stock are betting they can fob it off on someone else before the company goes belly-up.
It’s not really a bubble, but it’s pretty much indisputable that student loans are posing an ever-increasing burden to people – even doctors are having trouble dealing with their student loan debts these days! It seems likely that the situation will reach a breaking point in the relatively-near future.
Are you suggesting that people would stop making student loan payments and the securitized instruments would collapse? Or just that people would stop taking out loans? I understand student loans are getting ridiculous but I don’t see the bubble dynamics you’re getting at.
I’m not an economist. I don’t know what the end-point will be, but the situation is bubble-like in that the current situation is unsustainable, and whatever the eventual “correction” ends up being, it’ll likely be ugly.
Part of the problem is the market disconnect mentioned by Chappachula. When interest rates are typically 1% or less in an effort to pump up the economies around the world, there’s not a lot of wiggle room to differentiate securities. It also motivates people to jump on whatever bandwagon promises a percent or more return above that dismal average, which means flash-crowds of investors will aggravate the market.
The electric cars, just like Google and like Amazon, are banking on technology. The problem is that an electric car’s batteries are very expensive and barely have acceptable capacity. If/when technology fixes the cost and capacity problems (and durability) then the car already on the ground and running will sell the same vehicle at a tidy profit… Just as someone selling books to geeks with computer modems is now the biggest book seller (and other items) in the world, and the market dictator on ebook sales; or the geeks who just wanted to help people find websites, now have massive amounts of data for untold money-making opportunities and fantasic brand recognition.
(Of course, the catch in all that is that sooner or late Amazon or Google have to become mature businesses. once you own a market, double or triple digit growth is hard to pull off.
The key question, that distinguishes a bubble, though - is simple. Does the massive amount of money in the system/process/industry come from the lemming herds of other investors, of from proceeds from the actual industry you are investing in?
As for student loans - the usual saying is, “if things can’t go on this way… they won’t.” At a certain point, people will simply stop investing in college. Colleges will have to adapt - some will fold, some will actually reduce prices, some will specialize, cut out arts etc., many will panic. The industry will be very different in 20 years.