In 2008 we popped the housing bubble; in 2000 it was the internet bubble; before that we had commercial real estate, biotech, the oil patch, and LDC debt. Every few years a bubble comes along. So what’s next?
To foresee the next bubble, we need to understand the last. Sub-prime loans at insanely low rates enabled people to build and buy way more house than they needed or could afford. But hey, housing prices always go up, right? Cut rate margin loans allowed people to speculate on tech stocks who never should have been day-trading. But the internet promised a new era through productivity and efficiency, and hey, these stocks can only go up, right? LDC debt financed infrastructure construction and natural resource development in less-developed countries with newly found mineral wealth. Bankers flocked to snap up these loans, because hey, countries don’t go bankrupt, right?
Critical to any bubble is financing. What’s common here is cheap financing and an asset that seemed to only get more valuable. When you have a no-fail asset in a hot sector, bankers compete to lend against it, and the item grows in price exponentially. Speculators play the market with other people’s money, and when the price falls, the banks are left holding the bag.
So what can’t fail these days? Government. With the Fed holding rates near zero, there is little to check the growth of government spending. A $1 trillion deficit now costs less than a billion dollars a year to finance. And with the Fed buying Treasury debt, the cost is even less. Bond mutual funds keep growing even as yields fall to record lows.
But hey, government always grows, right?
Douglas R. Tengdin, CFA
Chief Investment Officer
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