Is there another boom/bust cycle currently ongoing in something other than housing

[dracoi]

@HMS_Irruncible

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 think there are two plausible concerns. One is that more people will default on student loans. The other is that student loans will be less used/less available, and that would result in fewer students. There’s a very large industry of schools (especially 2-year and technical schools) that depend on plentiful student loans. (I have a relative just laid off from management of a chain of those schools; they canceled plans to open a dozen campuses two years ago and plan to close half of the ones they already have over the next couple of years. They blame tighter student loan rules as a cause. Of course, that’s an individual company and may not represent the market overall.)

[md2000]

Here’s the government’s plan - according to the New York TImes:

Colleges with default rates of 30 percent or higher in any given year are now required to develop a plan for keeping more students on track to repay their loans. Beginning in September, institutions that reach or exceed the 30 percent for three consecutive years will lose eligibility for both the federal loan program and the Pell Grant program, subject to appeal. This places schools with runaway default rates at risk of having to shut down.

So in the next economic downturn, the university staff will join the ranks of the unemployed.

[Martin_Hyde]

I’m not sure there is a general tech bubble, but I’ve observed many of the stocks mentioned by Jonathan Chance, in that there is lots of invested capital in those companies and almost none of it (in my opinion) invested wisely. Some companies on that list like Amazon I think has a sustainable business model, Facebook probably does as well, even Twitter with its user base can probably turn a profit at some point with the right advertising setup. But the thing isn’t just whether those companies will collapse or not, but whether people buying at the current valuations are ever going to be rewarded as they expect.

My prediction is absolutely not, and at some point I’d expect these stocks to correct downward to a more reasonable valuation. Companies like IBM, Microsoft, Oracle, that are in the tech industry but have much more normal valuations and whose businesses are mostly infrastructure type business models now where lots of revenue is locked up in long term contracts and purchasing agreements are not overvalued and are basically “safe” blue chip type companies.

I wouldn’t call it a bubble, but I think the utility sector in general is now far overvalued. They got pumped up because their status as regulated monopolies made them a nice, dividend paying safe haven for investors during the roller coaster last few years of the stock market. But these companies are generally viewed as boring precisely because they are going to be consistent earners, consistent, meaning you aren’t going to see sudden swings of profitability increase for these guys. That means that while they may still be “safe” companies, buying at current prices they’re just too expensive for what they offer. You’re buying into a company whose pricing is akin to one you’d expect dramatic growth from, but the company is intrinsically a value company that will not be growing quickly at any point.

[Measure_for_Measure]

@Jonathan_Chance

Damn straight. And it does remind me of 1998-1999 again. Buying with loose cash on speculation that someday, one day there will be profits.

P/E of certain tech stocks:
Netflix 169.90
Amazon 563.43
Pandora N/A (not earning any money) (MKTCAP 5.51B)
Facebook 87.74
Twitter N/A (not earning any money) (MKTCAP 22.42B)
LinkedIn N/A (not earning any money)(MKTCAP 19.72B)

Only Google makes some sense:
Google 30.34

That’s slightly overheated, but by current tech stock standards this is very reasonable.

Tech overall isn’t especially highly valued though. Vanguard’s information tech index fund has a PE of 20.8 for example. VGT-Vanguard Information Technology ETF | Vanguard

Compare to the SP500 which has a PE of 19.1.
Also I don’t think stocks are overvalued relative to bonds. The 10 year T Note is near a 50 year low for example. Bonds, OTOH are very frothy. I see 2 broad scenarios:

1. The Fed tightens ~1-2 years from today, and continues a tightening path like they did during the early 1990s. That would be a disaster for bond prices.

2. The Fed tightens ~1-2 years from today, but does so at a slower rate: this implies that the economy is experiencing some sort of secular stagnation different than the economy exhibited during the Clinton era.
   Overall, all assets are overvalued and cash pays diddly squat. But that’s not really a bubble.

[ralfy]

Related:

“Top Derivatives Expert Estimates Size of the Global Derivatives Market at $1,200 Trillion Dollars … 20 Times Larger than the Global Economy”

http://www.washingtonsblog.com/2012/05/top-derivatives-expert-finally-gives-a-credible-estimate-of-the-size-of-the-global-derivatives-market.html

[watchwolf49]

Health service sector bubble?

[Exapno_Mapcase]

@ralfy

Related:

“Top Derivatives Expert Estimates Size of the Global Derivatives Market at $1,200 Trillion Dollars … 20 Times Larger than the Global Economy”

http://www.washingtonsblog.com/2012/05/top-derivatives-expert-finally-gives-a-credible-estimate-of-the-size-of-the-global-derivatives-market.html

If you read closely, you’ll see talk about how these are “notional values.” Those inflate values by many powers of ten. The article admits this and says that it doesn’t matter because if the system fails, banks are responsible for the totals, but this is mostly standard scare tactics. Looking at other financial articles on the site convinces me they are devoted to the boogeyman theory of “it’s all going to end badly.”

I think there is a particular housing market that’s in a bubble, though I disagree with the OP when he writes “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.” In small part, maybe.

But New York City ultrahigh-priced condos have insane values. New York magazine ran Stash Pad - The New York real-estate market is now the premier destination for wealthy foreigners with rubles, yuan, and dollars to hide.

It’s full of insane numbers about prices being driven up. And ends with this observation:

“How deep is the market?” asks Michael Stern, who is building a 1,350-foot-tall tower at 111 West 57th Street, designed by SHoP Architects. “I don’t know, and neither does anyone else.” But while no one can discern the ceiling on pricing, there’s a hard reality to the floor. Stern says that once land and construction costs are figured in, the break-even point for ultraluxury towers such as his is around $5,000 a square foot. In other words: On average, every inch of these buildings must sell for 30 percent more than Manhattan’s most expensive penthouse did a decade ago.

That’s a bubble.

[Diceman]

@Martin_Hyde

I’m not sure there is a general tech bubble, but I’ve observed many of the stocks mentioned by Jonathan Chance, in that there is lots of invested capital in those companies and almost none of it (in my opinion) invested wisely. Some companies on that list like Amazon I think has a sustainable business model, Facebook probably does as well, even Twitter with its user base can probably turn a profit at some point with the right advertising setup. But the thing isn’t just whether those companies will collapse or not, but whether people buying at the current valuations are ever going to be rewarded as they expect.

Interesting. Do you think that part of it is investors “doubling down” because they don’t want to admit (to themselves) that they’ve made bad investments?