Global Megabubble?

[REWahoo]

This guy may have cornered the market on "gloom & doom". How do you score his "poll"?

REW
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Global megabubble? You decide
Real estate is only tip of worldwide iceberg; or is it?
By Paul B. Farrell, MarketWatch
Last Update: 6:43 PM ET June 26, 2005


ARROYO GRANDE, Calif. (MarketWatch) -- One thing I know is that real estate moves in grand cycles, from bubble to bust. I also have discovered that many people actually love blowing bubbles, until they bust, like party balloons. I hear it everywhere today, from self-serving folks all over Washington, Wall Street, Corporate America and cable TVs talking heads. Even the Fed chairman blew a little "froth" into the housing bubble.

But here's some new insight: This is not a normal domestic real estate bubble/bust cycle. We may be in an extraordinary global megabubble and real estate is just one of its many components.

If this megabubble exists, and if it bursts, the $8 trillion in wealth lost in the 2000-2002 bear market will be peanuts.

Still, I'm skeptical. I don't trust doomsday "global meltdown" warnings any more than all the self-serving hype from America's happy-talking bubble-blowing gurus, economists and politicians. But I do trust your opinion.

So I put together this Megabubble Poll. You get to decide if we're in a megabubble and when it'll explode. Please look closely: This may be the single most important poll you ever take, especially if you're a retiree or boomer near retirement. If you're unprepared, another bust could damage your financial future for years to come.

So put on your thinking cap with me. Follow the clues. Then you decide if you see the bubbles! Look at each separately and then score them on a scale of 1 to 5, with 1 being the least likelihood of a bubble and 5 meaning there is a definite bubble about to burst. Then total your score and send it to me:

The Megabubble Poll

1. Real estate bubble. Clues: Speculators driving prices. Lenders offer cheap money, short-term loans. Home-equity loans fund short-term spending. Fed chairman sees minimal froth.
2. Energy and oil bubble. Clues: Crude hits another record. Political turmoil in oil-producing nations. Consumers buy gas-guzzlers at record pace. GM, Ford in trouble.
3. Foreign-trade deficit. Clues: Monthly deficits top $50 billion. This year's deficit will beat 2004's $617 billion. Foreigners now own $2.5 trillion of America.
4. Federal-budget deficit. Clues: Federal debt now $7.8 trillion; add another $400 federal deficit this year.
5. Corporate pensions underfunded. Clues: Airlines, auto, other manufacturers heavily burdened, default to taxpayers.
6. Local government pensions deficits. Clues: A near $400 billion mess draining local taxpayer resources.
7. Weak U.S. dollar. Clues: Fear China and other foreign powers will replace dollar reserves. Warren Buffett now betting $20 billion on foreign-currency hedging.
8. Social Security deficit. Clues: No choice, cut benefits or raise taxes; politicians hate both, so it'll get worse.
9. Health-care costs. Clues: Burden shifting to employees. Costs above inflation. 43 million uninsured.
10. Medicare deficit. Clues: Going broke faster than Social Security. Prescription drug benefit added an unfunded $8.1 trillion. Long-term estimates over $36.6 trillion.
11. Personal-savings shortfall. Clues: We consume not save. National savings rate is zero, down from 8% two decades ago. Average household net worth less than $15,000, excluding home equity.
12. Consumer debt bubble. Clues: We're living beyond our means. Consumer debt at $2 trillion. At 13%, household interest as a percent of income is at all-time high. Personal bankruptcies rising.
13. War and defense deficit. Clues: Iraq and Afghanistan wars cost over $200 billion a year, $2 trillion a decade.
14. Homeland insecurity. Clues: Minimal legislation to protect ports and chemical plants. Federal budget even cut border patrol 90%. Vigilantes patrolling.
15. Class gap widening. Clues: Superrich and CEOs getting increasing share of wealth, ownership and tax cuts.
16. Congressional pork. Clues: Both parties act like teenage addicts on a spending spree with stolen credit cards. By not using the veto, the administration acts like a parent who needs Nanny 911.
17. International credibility. Clues: Image problems: Post-9/11 imperialism, WMDs, Abu Ghraib, Gitmo and more.
18. Junk mailings. Clues: Mail solicitations increasing for credit cards and hot stock newsletters.
19. New "Mad Money" cable show. Clues: Frantic, manic entertainment; 1990s irrational exuberance again.
20. Numerous key mini-bubbles. Environmental, resources, technology, educational, outsourcing, jobs, you pick!

Now total up your scores on these individual bubbles. If your total is 50 points or more, you see a megabubble dead ahead. Prepare accordingly. If you're close to 100 points, consider a very conservative strategy.

Remember, history and behavioral-finance experts tell us that most investors cannot see bubbles when they're in them. And if they do see, they don't act until it's too late. Meanwhile, send us your megabubble totals, so we can aggregate the collective mindset.


http://www.marketwatch.com/news/sto...3FC-4FEC-BE52-7011528EA798}&siteid=mktw&dist=

 

[HFWR]

1=not a problem, 2=somewhat, 3=problem, 4=needs attention, 5=impending doom

1 - 3.8  Might get ugly, but unlike furniture.com, real estate isn't vaporware.
2 - 3.3  Oil is NOT at an all-time high!
3 - 3.9  More energy reliant USA would solve much of this.
4 - 3.1  PORK PORK PORK - Revs up w/ lower taxes, improved econ.
5 - 3.9  Somehow I feel we'll end up with the bill for this...
6 - 3.5  Smaller govt?
7 - 3.2  Makes us cheaper!?
8 - 3.8  Can be fixed, but will it?
9 - 4.3  The 800-lb. gorilla (but does it have fruit on it's head?)
10 - 4.3  See #9.
11 - 4.0  Debt bad...  saving/investing good.
12 - 3.5  Debt bad... saving/investing good.
13 - 3.5  Damned expensive, this nation building stuff...
14 - 3.6  Ben Franklin was right about sacrificing liberty for "safety".
15 - 3.0  "Tax the rich, feed the poor, 'til there are no rich no more..."
16 - 4.0  "A man with a briefcase can steal more money than a man with a gun"...
17 - 2.5  Wax, wane, wax,wane... We could probably use a makeover.
18 - 1.0  And chain-letter scams...
19 - 3.0  Not terribly important, but I hate reality TV...
20 - 3.5  Lotsa issues that need some attention.

68.7 - Better head for the hills...

Of course, some would say I'm a contraindicator!

 

[Nords]

Isn't Paul Farrell the guy who writes financial books with real big fonts, short paragraphs, small words, and lots of white space?

I'm going to have to find the book of his that I read (or tried to). It was underwhelming, as is his concern for "international credibility" (whatever that is).

 

[Honkie]

Has anyone else noticed that the article is entitled "Global Megabubble" and reference to "global", "world" or "worldwide" are made a further 3 times. Yet, only items 2, 13 and 17 can be argued is "global" problems. The rest are purely US domestic issues. e.g. "Foreign-trade deficit. Clues: Monthly deficits top $50 billion. This year's deficit will beat 2004's $617 billion". Which means that someone somewhere is $50 billion a month / $617 billion a year richer. A US problem, yes, but a global problem, no. For every deficit (or liability) there is a credit and the guy holding that credit has a big fat smile on his face!

 

[haha]

Has anyone else noticed that the article is entitled "Global Megabubble" and reference to "global", "world" or "worldwide" are made a further 3 times. Yet, only items 2, 13 and 17 can be argued is "global" problems. The rest are purely US domestic issues. e.g. "Foreign-trade deficit. Clues: Monthly deficits top $50 billion. This year's deficit will beat 2004's $617 billion". Which means that someone somewhere is $50 billion a month / $617 billion a year richer. A US problem, yes, but a global problem, no. For every deficit (or liability) there is a credit and the guy holding that credit has a big fat smile on his face!

I guess this could actually be seen as a global problem, in that practically speaking the US credits held by China are not very liquid, or very profitable in real terms. This is actually a form of international vendor financing, which may make for dicey events in China's industrial economy going froward.

One doesn't want to be an overextended borrower, or that borrower's banker.

ha

 

[Honkie]

I guess this could actually be seen as a global problem, in that practically speaking the US credits held by China are not very liquid, or very profitable in real terms. This is actually a form of international vendor financing, which may make for dicey events in China's industrial economy going froward.

One doesn't want to be an overextended borrower, or that borrower's banker.

ha

True, but only if one assumes that the US is going to start defaulting on it's soveriegn debt.

 

[haha]

True, but only if one assumes that the US is going to start defaulting on it's soveriegn debt.

Well, it's true that we can take their US$ bills and bonds and give them US$. But what can they do with the $? If they buy too many Unocals, I suspect it will become very politically charged.

We can't give them goods and sevices. Most of what we offer they don't want. Some of what we have-defense- we don't want to sell them. Other stuff , non defense relevant software, they can steal. We can only hope they want a lot of Boeing planes and Washington wheat, Iowa corn and California rice.

ha

 

[Honkie]

Ha. You make a good point, but the premise is limited. The US$ is, for the time being at least, the currency of international trade (mostly). So with a pocket full of US$, the Chinese (or whomever) can buy Middle Eastern Oil, Nigerian LNG, Australian wheat/cattle/sheep and iron/copper ore, European luxury goods, South African Gold, Russian Vodka, Swiss Cuckoo Clocks, Indian software - the list goes on. If I remember correctly, the majority of US$ are not held within the US. These $'s don't necessarily have to be used to procure anything directly from the US. Yes, ultimately the holder of the dollar has a call on the US Treasury, but in the meantime, that dollar can swim around the world, buying selling goods and services on the international markets without ever touching the US or a US supplier/vendor.

 

[haha]

Ha. You make a good point, but the premise is limited. The US$ is, for the time being at least, the currency of international trade (mostly).

This makes my head swim. I really don't have the background to understand it in depth. I just can't escape the feeling that this is an international game of "Old Maid". I suppose that the USDs will ultimately pile up with oil and other commodity exporters, who will then have the Old Maid. But if I were BHP Billiton for example, I would rather have iron ore and uranium and copper etc than US$. But then again, I suppose they can buy stuff from China, and China will have the Old Maid. See what I mean, it is dizzying!

ha

 

[Nords]

Well, it's true that we can take their US$ bills and bonds and give them US$. But what can they do with the $? If they buy too many Unocals, I suspect it will become very politically charged.

We can't give them goods and sevices. Most of what we offer they don't want. Some of what we have-defense- we don't want to sell them. Other stuff , non defense relaevant software, they can steal. We can only hope they want a lot of Boeing planes and Washington wheat, Iowa corn and California rice.

ha

The more I read this type of post the more China sounds like Japan.  Economic juggernaut with a strong currency seeking world domination and buying one square block of Manhattan after another, rising hard-working middle class with new TVs & cell phones & cars, concerns over a strong military and regional dominance.  Everything we make goes to support their lifestyle.  A new world order, but only if you speak tourism Japanese.

Oh, yeah, there's also colossal govt waste & corruption that regularly fudges the numbers, an overextended & unregulated banking industry making subpar loans on bad collateral, widespread industrial monopolies caring more about each other's finances than about accurate accounting & full public disclosure, a world-class stock market bubble, and consumers who don't hesitate to snap their wallets shut when the employment picture tanks.  While the govt fumbles around hoping that everything will get better before they have to do something about their deficit spending.

But surely with China it's really different this time.  

And of course this couldn't possibly describe America!

 

[Honkie]

Well, yup, dizzying it is! At the end of the day there is no right answer or "solution" to any of this. Like any facet of economics, normal market forces will only stretch so far out of whack (politically motivated interference/subsidies etc notwithstanding) before it springs back.

 

[Whakamole]

But surely with China it's really different this time.

And of course this couldn't possibly describe America!

Funny, I was chatting with a friend about this. He described in great detail what China is doing.

Basically, all these dollars are going into the state bank, which are then being forced upon the various local banks which then lend the money to the factories that are producing all the "made in China" stuff you see at your local Mao Mart, and thus the great cycle returns.

The problem is that any cooling off of the US consumer means that the banks stop getting an influx of dollars and have to call in their loans on factories which are no longer making the money they once were.

China is effectively building their economy on a false premise (their currency being undervalued.)

One can say the US is being fiscally irresponsible - on the other hand, if they want to give us stuff while we foister dollars on them, and we're paying (effectively) less than market, who are we to complain?

 

[Honkie]

Nords, you are right when you observe that China has far more problems that it has successes at the moment. I think it is simply politically expedient for certain US factions to stir up the hornets nest to provide another "face" to the (economic) enemy. The reality is that China has a lot of domestic problems to resolve. It won't be another "Japan World Domination Tour 1980 - 1986". Of the 4 dominant economic power centres in the world today - the US, Europe, Japan and China, all have serious structural economic issues to address.

 

[Nords]

... on the other hand, if they want to give us stuff while we foister dollars on them, and we're paying (effectively) less than market, who are we to complain?

Exactly-- reisistance is futile and they will eventually be assimilated into capitalism...

 

[Honkie]

Funny, I was chatting with a friend about this.  He described in great detail what China is doing.

Basically, all these dollars are going into the state bank, which are then being forced upon the various local banks which then lend the money to the factories that are producing all the "made in China" stuff you see at your local Mao Mart, and thus the great cycle returns.

The problem is that any cooling off of the US consumer means that the banks stop getting an influx of dollars and have to call in their loans on factories which are no longer making the money they once were.

China is effectively building their economy on a false premise (their currency being undervalued.)

One can say the US is being fiscally irresponsible - on the other hand, if they want to give us stuff while we foister dollars on them, and we're paying (effectively) less than market, who are we to complain?

Whakamole - your post is spot on as far as it goes, but it doesn't cover the full picture.

The majority of China's trade is NOT with the US, only about 20% (I think) is with the US, therefore if US-China trade shrank by 10%, it's not on effect on China's economic output would only be 2%. Clearly, a contraction on US economic spending on this scale would have other global knock on effects though, granted.

Also, I do wish I had the "China is cheating by undervaluing it's currency" spin doctors working for me - they have everyone believing this nonesense and worse they have people believing that it China revalues than all problems are solved. Even Jon Snow and Greenspan argued against it last week (well, at least saying it would a negligible effect) Actually, the last thing the US polico's should really want is for China to revalue, as it would expose it for the fallacy it is. Further China is largely a net importer or natural resources and raw materials, therefore it's alleged benefits at the sales end of the curreny revaluation argument are wiped out at the procurement end of the argument.

Most of the dolllars stuffed into the Chinese banking system previously went to support inefficient, effectively bankrupt SOE's (State owned enterpises). This is now changing with the drive towards a more efficient and effective capital and banking sytem. But the fruits are many many years away for them and in the meantime they have to deal with the economic and social unrest of SOE's laying workers off, not being able to continue with state sponsored pension and social obligations etc etc. It really is a fine and delicate tightrope they are walking.

 

[haha]

The more I read this type of post the more China sounds like Japan.

I don't think that is necessarily comforting. Where Japan and US go head to head, as in cars, high quality optics, etc., US doesn't win much.

If China gradually goes up the curve of sophistication and price points, we have much to fear IMO.

Then there is the fact that their people still go to schools where the objective is learning useful things, not making minorities feel "enfranchised".

Ha

 

[Whakamole]

Honkie, I'm not saying that China is "cheating."

Rather, that they are building an entire economy around an undervalued currency - since they're also undervalued relative to Europe and other countries that they export to.

Also, because their currency is undervalued, their US dollar reserves are (to them) overvalued. Even if they invest the money, they're still overpaying. That they seem to be focusing on natural resource companies - which are already overvalued in today's marketplace - means that when the crash comes, it will hurt them even harder.

Throw in the Chinese real estate bubble, and you have a recipe for disaster if they fall off the tightrope. The Japanese economy is still a basket case.

 

[Nords]

Then there is the fact that their people still go to schools where the objective is learning useful things, not making minorities feel "enfranchised".

I'd be more impressed by that if American students were clamoring to enter Japanese or Chinese schools.

Instead it seems to be more of the reverse. I wonder if there's a credible study comparing student attendance at foreign universities to their country's schools.

 

[HFWR]

http://www.economist.com/agenda/displayStory.cfm?story_id=4100521

Companies and asset managers have tended to take a laid-back approach to pension underfunding, relying on the markets to right things as they often have before. What is worrying about the latest numbers is that we are seeing them towards the end of a period of strong economic growth and corporate profitability, neither of which is likely to continue. John Mauldin, an investment consultant, calculated in a recent column that total portfolio returns over the next ten years were likely to be around 5%, far less than the 8-9% projected by most funds. He reckoned that the total shortfall in America could be somewhere between $500 billion and $750 billion. And that is without counting companies’ promises to provide health care to employees and retired workers. Nicholas Colas at Rochdale Research, an independent firm, calls these obligations a bigger problem than pensions because they are neither funded nor insured.

 

[Nords]

And that is without counting companies’ promises to provide health care to employees and retired workers. Nicholas Colas at Rochdale Research, an independent firm, calls these obligations a bigger problem than pensions because they are neither funded nor insured.

If the media accounts are any example, apparently some companies don't consider them to be promises or obligations either.

 

[haha]

I'd be more impressed by that if American students were clamoring to enter Japanese or Chinese schools.

Instead it seems to be more of the reverse.  I wonder if there's a credible study comparing student attendance at foreign universities to their country's schools.

I am not talking about post secondary schools. I think it is still true in America that if you want to learn something real in a university, and you choose the right university and the right department, you can learn something real.

What is more relevant to my thesis is that in our quality US universities, more Phds in science and math are earned by non-US students; and in various international comparisons of primary and secondary school achievement, US students are near the bottom of the industirialized world.

Enougth for me 

 

[Nords]

What is more relevanmt to my thesis is that in our quality US universities, more Phds in science and math are earned by non-US students; and in various international comparisons of primary and secondary school achievement, US students are near the bottom of the industirialized world.

Enougth for me 

I hear you, and I don't disagree.

But my kid takes Kumon math in addition to middle school. In Kumon you get the assignment, you work through the problem, you get the answer, and you move on. You have to be able to plug through a certain number of problems in a certain amount of time at a specified degree of accuracy to move to the next level. (It's like a video game with a monthly subscription fee.) Once you learn how to do the problems, it's pretty much rote repetition of 40 or 50 examples.

She's much more frustrated by middle school because the teachers don't just expect her to plug through the problem-- they expect her to explain how it works, in her own words, frequently in a written essay. She can do probability calculations for hours but she has a hard time explaining whether or not to draw to an inside straight. And despite hours of my patient tutoring she still hesitates to double down on a soft 17 when the blackjack dealer is weak.

Most of those international comparisons are based on multiple-choice exams, although a very few are starting to include "show your work" and "write an essay". So I think that the exams are very good at measuring rote learning, and not so good at measuring comprehension & creativity. It's also unfortunate that the big colleges still put way too much emphasis on SAT/ACT scores, although the students are rapidly learning to game the system.

I'd like to know how America's visa system affects a foreign student's education vs employment decision. It may be easier to stay in school on a student visa (and thus end up plugging away through PhD) than it would be to get an H-1 employee visa with an American company. Or maybe a PhD is the reason a foreign student comes to America in the first place, and returning home without it would mean major shame. Meanwhile the American undergraduates are being encouraged to get that bachelor's and then get out to the real world for some real experience before going back for that MBA. I'm not saying that's the reason for more foreign PhDs, but I think it bears studying.

Loren Pope has it right-- give me a small college, maybe even a liberal-arts one, every time.

 

[Honkie]

Also, because their currency is undervalued, their US dollar reserves are (to them) overvalued.  Even if they invest the money, they're still overpaying.  That they seem to be focusing on natural resource companies - which are already overvalued in today's marketplace - means that when the crash comes, it will hurt them even harder.

Throw in the Chinese real estate bubble, and you have a recipe for disaster if they fall off the tightrope.

Which makes me even more certain that dramatic fiscal policy changes like a yuan revaluation will not happen, no matter how much western powers bleet on about it. Falling of the tightrope would be disastrous, and so all social and fiscal policy developments will be slow and gradual, VERY gradual. No shocks and U-turns in their policy planning. It obviously helps when everyone knows that the current leadership will be there for the next XX years - no policyphilosophical shift every 4 or 8 years. Long term planning is 20+ years as far as the Chinese Gov is concerned.