Skip to comments.The next bubble: "The Next Bubble: Priming the markets for tomorrow's big crash"
Posted on 10/11/2008 12:52:04 PM PDT by truth_seeker
A financial is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rareone every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid raising or pretending to raise a transferable stock. For a century this law did much to prevent the formation of new speculative swellings.
Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.
(Excerpt) Read more at harpers.org ...
Bubbles are not rare.
If one reads back over the financial history of the US, one sees that excess investment in constantly chasing around from one asset class to another. This is our fourth or fifth time down the cycle of “equities->housing->commodities->farmland->bust.”
We’re about to see farmland deflate in value as the final act to this go-round.
You're correct. In addition, a massive deflation in commercial property values is underway, although vey few people realize it.
IN reality America has had more than five panics. In fact, there have been thirteen in all. These thirteen panics have occurred as follows:
The rest is in PDF format.
>> Were about to see farmland deflate in value as the final act to this go-round.
Hope you’re right. I’d like to pick some up.
This is my 5th one. 1972, 1987, 1991, 2001 and now 2008.
What has made them tolerable is to have low debt and low debt on real estate. Twice I got creamed on jobs and was without work for at least 6 months.
Since I have been thru so many serious down turns, I have become a serious saver. I get thru each time and have been able to pick up the pieces that others have left behind.
Never forget, it is not if a downturn is going to happen, it is WHEN the downturn is going to happen..
I figure that should be sometime about June 2009.
Maybe McCain knows so much about all this and it scared the crap out of him. Thus, he doesn’t want to be president and that’s why he’s trying to lose.
False. It passed that act *during* the bubble, to avoid funneling of funds to *alternatives* to South Sea. It was goosing the bubble not regulating it, by stamping on rivals. After the crash came anyway, it was reinterpreted as a piece of prudence, and so understood by the existing joint stock companies, the Bank of England and the East India Company.
I didn’t write the article. Just posted it, because in its ENTIRITY it makes several good points.
As long as interest rates are low for the instutional investors the commercial side will be ok. If your not a instiutional investor funds will be tight and expensive. They are buying deals at 6% caps which keeps values high. A small fry would be laughed out of the bank asking for 4.5% loan.
Thank you for posting this. I am bookmarking to finish reading this later...
Were about to see farmland deflate in value as the final act to this go-round.
Permit me to offer an applicable antidote. I have been looking at online real estate ads for quite a while. My wife and I have toyed with the idea of moving into the mountains. A day or two ago I found an ad not in the mountains but in the NW portion of South Carolina offering a small house and 20 acres with a stream and wildlife habitat. The ad said that the most recent appraisal was for $200,000. but the “motivated” owner had dropped the price by $50,000. which sounded like quite a reduction but the asking price in the ad was even lower, $129,900. I wonder if that ad is an indication of things to come.
I don’t know if McCain is really trying to lose but I and many, many others have said that nobody in his right mind would want the challenge of being the next president of this nation. To any thinking person the fact that Obama wants it so badly even though he is almost totally unqualified by experience and temperament is more than enough to scare you silly. It would take a monumental confidence in oneself to believe that you can straighten out this mess. This looks like all the labors of Hercules at once.
I do hope that Obama KNOWS he’s don’t know. At least that way he’ll surround himself with people who DO know. But it is scary to know that everything he says is something he was told to say.
Of course he is unqualified. So is McCain. But whoever wins will just gather up a bunch of bankers from Goldman Sachs and economists from Harvard, in the longstanding American tradition.
“And much of the “dot-com crash” was due to Democrat investors showing their madness against President Bush being elected. And much of the “dot-com” work has been moved overseas.”
Investors don’t much come in partisan flavors.
The dot.com bust was due to flawed business models for most of the new companies.
Our current financial crisis was apparently caused by hedge fund losses and credit default swaps. Large investors decided they were going to cash out of the hedge funds and the fund administrators have had to unload huge amounts of stock accumulation to cover the call. Who are these large investors that are cashing out? Foreign entities perhaps? The USA is nearing bankruptcy. These foreign investors will come back in cash rich and buy up the dirt cheap assets.
I live in the Aiken area which is across the Savannah River from Augusta, GA. NW South Carolina is awesomely beautiful. I almost moved to Seneca. Anderson is nice too.
Yes, it is, but that isn’t necessarily farmland. It is no doubt in a more rural area and influenced by farmland economics tho.
I’m talking about the farmland that is actively farmed to produce commodity crops (eg, the big six: corn, beans, hay, wheat, cotton, sorghum and rice, by acres, in that order). If you look at production land rents and sale prices, you see that they peak just after commodities peak.
Well, commodities are rolling off sharply now, as hedge funds and various index funds sell out of their commodity positions. December ‘08 Corn is now down to around 4 bucks, and it was limit-down yesterday. Hard, hard selling. The fact that this is coming on the end of a season will give many producers second thoughts about paying big bucks to buy more ground - they might pay for more land, but they’re not going to be paying nearly $5K to $9K/acre for farmland.
I think before long, we’re going to see farmland drop around about 15% or so across the US. Without the speculative run-up in commodity prices caused by hedge funds, et al, farmers won’t be able to justify the currently high prices in ag production land going forward. 15% doesn’t sound like much... but most people don’t understand that farmers don’t get 0%-down loans on real estate. Typical down payment on a farm land loan is 35%.
There are also several insurance companies and hedge funds who thought it was a good idea to get into farm land, because they believed that commodities prices would remain at highly inflated prices going forward. Nope. They also ignored history. There’s going to be some farmland that comes on the market from people and companies that don’t know jack about the farming business cycle, and they paid nearly top-dollar for farmland, when they should have been buying back in 1997, when farmland prices were depressed as commodity prices were low, low, low.
You’ve put your finger on two immutable pieces of truth:
1. Being a saver allows you (or a company) to weather the downturns.
2. Downturns are inevitable.
I agree with you completely that commercial real estate is undergoing deflation.
More people will realize it when smaller, or regional, banks start to go belly-up when commercial real estate projects go under, or construction on CRE goes bust.
Due to the dominance of a few national lenders in residential real estate, many smaller and regional banks turned to the CRE market for where to make their money. As a result, some smaller/regional banks have highly concentrated loan portfolios in this one sector. Not a suave move.
As some of these banks go under, we’re going to see lending standards for CRE be crimped tighter, just as residential standards are being crimped.
Wrong. The catalyst for the dot.com crash was the Microsoft`trial in March of 2000.
Yes, the equities crash of ‘01 to ‘03 is what shifted attention and assets away from equities and into real estate. This is a time-proven tendency for bankers and investors in the US. We have an equities run-up, an equities peak, then a crash in equities, followed by investor attention turning to residential real estate.
This is followed by commercial real estate.
The run-up in built-up real estate helps fuel a commodities boom (and this time ‘round, the ChiComs really poured gas on the commodities fire), which, combined with the conversion of farmland to developed real estate, fuels a run-up in farmland prices.
When the residential real estate boom blows out, it takes everything else down with it.
There is a paper I read recently that makes the case that the residential real estate cycle is, in effect, the majority foundation for the US business cycle. When real estate flounders, the economy as a whole takes a hit to the head. The dot-com implosion was an exception in many ways... and I think caused by a new, disruptive technology, much as the stock boom in the 20’s was caused by radio and autos, also disruptive technologies.
However, I have to disagree with you on whether the overvaluation is not the cause for the crash. Ultimately, we can agree that the cause of this crash was that people were given large amounts of credit which they could not repay.
Well, why did the mortgage industry invent all these goofball loan products?
Because in many regions of the US, residential real estate is wildly over-priced. The long term median for residential, single-family, owner-occupied real estate prices in the US is 2.6 to 3.0X the household median income.
eg, if the household income is $50K, they should be able to afford a $150K house.
But in many regions of the US, especially (but not only) California, the median sales price of a home is 6.0 or more times the median household income for the area. This is simply out of the price range of the majority of people in that market.
So banks respond by “getting the monthly payment down” — by reducing the down payment required (ie, higher LTV’s - loan-to-value ratings), artful loan products like the ARM, the interest-only, neg-am, pay-option ARM, etc, as well as longer duration loans (I’ve seen 50 year mortgages in California). These serve to further inflate and warp the market, because they disconnect the buyer from the reality of the market - that they simply cannot afford the house.
They also inflate home prices - realtors and appraisers like to say “Real estate is worth what someone will pay for it.” That isn’t true recently. Real estate became worth what a bank would lend on it. The “owner” was being insulated by the terms of the loan from the price signal.
Inevitably, these goofball loan products could not shield home buyers from the reality of the situation, and far too many banks and buyers made a truly idiotic assumption when they all assumed that house prices only go up, and when (not if) they do, the buyer could roll out of one goofy loan into another, newer and even goofier loan product to forestall the day of reckoning.
Nope. World doesn’t work that way. The longer that this condition persisted, the further we were going to have to fall in the end... and as we see now in California (and other places) in the Case-Shiller index as well as other places.
One thing the article did not mention is that every recent bubble was aided and abetted by Congressional Democrats. The Dems always engage in active mis-regulation and manipulation to enrich their own coffers as well as those of their wealthy, elite cronies. The money always comes, effectively, from the taxpayers and consumers. The Dems know that ultimately the bubble will bust, so they have their PR/Spin machine cranked up ahead of time, to pompously blame Republicans, Greedy-Businessmen, Deregulation, etc. The media acts like a ventriloquist's dummy and spews the nonsense to the public.
I read an article a few years ago which put forth the premise that as much wealth is created under Democrat administrations as is created under Republican administrations. At first I was skeptical, but after reading the article, I realized it was true. The wealth created under the Dems is essentially mandated to be created by regulations that favor an industry or a company, while stifling competition. It is never a good deal for the average taxpayer/consumer, but it does make some people rich.
In the interest of full disclosure/s, Pelosi, Gore and many other Dem politicos own shares of “alternative energy” companies, which otherwise could never earn a dime. If Obama is elected, I guess I will too (If the totalitarians will allow me to continue to own stocks - that may become prohibited, except for the Elite).
Well, I figured I would take a hit on that comment which I probably could have expressed in a better way.
I just wonder what will come after the bust is over?
I still think we need new industries to take root and grow. A “service” economy just won't cut it in the long run.
I'm thinking nanotech, AI/robotics, and/or genetics.
The birth of the future tech singularity?
Well... The sorry trend from history is that often a war follows, which really tends to goose the economy.
Right now, we’re in a war, but it isn’t goosing the economy the same way past wars did.
There’s several disruptive technologies out there in the wings, and I agree with you that a service economy doesn’t cut it in the end. The contribution of finance (which is ostensibly a “service”) to the SP-500 went from a historical 8% component of SP-500 earnings to nearly 25% from the early 90’s to earlier this year. That’s just outlandish — 25% of the earnings of the best historic indicator of the US economy from shuffling little bits of green paper hither and yon? That’s absurd.
There’s lots of biotech, nanotech and other stuff out there, waiting in the wings to make huge contributions to our economy, as you rightly point out... I don’t know how many people these technologies will employ because they require people with very high levels of education in very narrow specialties. The companies that specialize in such things stand to be incredibly profitable, but also exposed to regulatory hurdles that will make investment rather fraught with wild swings in valuation.
They certainly have huge markets world-wide and stand to make significant contributions to our GDP, but perhaps not our employment numbers.
Paul Volcker was just interviewed this week by Charlie Rose, and he had a classic quote: “We need fewer financial engineers and more electrical engineers, and mechanical engineers, chemical engineers, etc...”
Volcker’s central point was as mine above — 25% of the SP500 earnings coming from “finance” is simply unsustainable. They’re just not adding real value to the US economy to sustain those earnings...
Reading all posts with interest.
If you haven’t noticed I’m pissed. The homeowners across the country have got the triple whammy in the last several years. This includes a lot of people who were once reasonable risks. The inflated home prices caused by speculation, the fact that wages for most middle class people are stagnant and to top it all off gasoline and heating costs going up several thousands of dollars a year. When fuel prices headed to the sky this year Bush and Pelosi should have done whatever it took to stop it. They did have options, but they chose to sit there with their collective thumbs up their arses. I am a free market believer ,but, if a company ,to please its share holders,throws 500 Americans to the wolfs just to increase a dividend a few percent then this is a recipe for serfdom. With productivity increases wage increases are not inflationary. I have seen the talking heads on TV say time and time again that wages going up was a bad thing because it is inflationary. Bull. Something here is broken boys.
How true. I did not read the entire article, but the beginning sure was incorrect from an historical perspective.
You have a point, but then again, Reagan fixed an even bigger mess. He merely stopped trying to have the government help and let the markets fix themselves. It can be done again, but will be difficult with dems in control of congress.
It will be impossible with the socialists in control of congress and even with diehard Reagan conservatives in control it won’t happen fast. Twenty eight years have passed since Ronald the Great was elected and a lot has changed. There is a lot wrong besides the recent financial flailing about. Our only real hope is for the very young people who are just starting out in life to rise up in rebellion against all the left wing insanity that we are saddled with and return to traditional American values. I do see this as a possibility but a slim one.