Posted by Steve Markowitz on September 25, 2015
In 2008 the worldwide economy seemed at a precipice. Politicians and economists demanded action that resulted in significant governmental interventions. It is not possible in hindsight to argue with the policies given the fears at that time. It is also impossible to determine if we would we would have gone off the economic cliff without the by central banker actions.
We have been taught there is no such thing as a free lunch. It seems this lesson has been lost in recent decades, especially when it comes to policy and economic decisions. The interventions made by central banks including the Federal Reserve since 2008 are historic. Banks have purchased their countries’ debt, in essence printing money. While so far the negative economic consequences have not been catastrophic, there will indeed be consequences.
There are two general problems typically arising from excess money supply. The first is inflation. Inflation has historically been across the board with increased prices for many categories of goods and services during these periods. This type of inflation has yet to occur.
Another issue arising from an oversupply of money is bubble creation in certain asset categories. This is basically a different type of inflation and it is a growing problem. Initially the asset bubbles occurred in commodities with prices of oil, gold, and other metals significantly increasing. These bubbles have already burst with negative consequences affecting exporting countries. This includes oil-producing countries such as Venezuela, Saudi Arabia and Iraq. It is also damaged Canada and Australia who initially benefited from the overvalued commodities being purchased by China.
More recently, Chinese and other countries have significantly cut back on commodity purchases as their economies’ have slowed. Ups and downs are a normal part of business cycles. However, the uptick since 2008 has not been normal, but instead has been artificially created by various countries’ cheap money policies and deficit spending.
The popping of the commodity bubbles has brought consternation to equity markets that have shown increased volatility. This is of significant concern because these equity valuations are one of the few remaining mega bubbles. When this equity bubble pops, the consequences will be ugly. Read the rest of this entry »
Posted in Bubbles, Debt | Tagged: Baby Boomers | 1 Comment »
Posted by Steve Markowitz on September 3, 2015
The last few weeks have come with increasing turmoil in equities markets. One day last week the Dow dipped nearly 600 points, only to recover nearly 450 the next. The market’s gyrations are occurring after their values had been relatively flat for the past year. This is problematic since prior to the flattening, increasing equities’ valuations masked broader weaknesses in the economy. For example, increasing equity values offset some losses inflicted on parts of the economy due to the low interest rates that decreased returns on fixed income investments.
The signs are clear; the equity bubble is at risk. Many blame the volatility on problems with the Chinese economy. However, as this Blog has proffered previously, Federal Reserve and US governmental policies are the culprits. Read the rest of this entry »
Posted in Bubbles | Tagged: Bubble, economy, Equities, Fed, Interest, stock, US | 1 Comment »
Posted by Steve Markowitz on March 21, 2015
It was just six years ago that the world was at the brink of economic Armageddon. The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640. The cheap mortgages to those with limited assets helped create a huge bubble in the housing market. When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.
Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure. This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers. In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans. Without the bailouts they would have encountered substantial financial losses.
There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market. Without suffering losses investors have had short memories and in fact they are back at it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.
Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans. Today, subprime loans are not in the housing market, but in consumer goods. The Journal published the following:
- Subprime loans are at the highest level since before the 2008 financial meltdown.
- Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
- During the fourth quarter of 2014, total US household debt increased by over $300 billion.
The Federal Reserve’s low interest rate policies are pushing investors to greater risk as they seek returns. This, coupled with the availability of cheap capital has offered incentives for nontraditional lenders to enter the credit markets. For example some venture backed funds are fueling the growth of subprime lending, such as Lending Tree, Inc., an online auto loan marketplace. These lenders are not regulated and are likely to use leverage and other financial games to pursue even more subprime lending, a repeat of the actions behind the 2008 financial crisis.
Subprime lending is fueling economic unsustainable growth. For example US auto sales topped 16.5 million in 2014, a nearly 6% increase from the previous year and up nearly 60% from 2009. When the inevitable slowdown occurs, an increasing number of subprime borrowers will be unable to repay their loans, a repeat of what led to the 2008.
History has demonstrated that booms and busts, and yes bubbles, are at normal part of economic cycles. However, major macroeconomic bubbles have generally been a once in a generation occurrence that is self-correcting and serves as a reminder to that generation of the pitfalls of imprudent economic behavior. The collapse of 2008 was different with many investors being bailed out and equity markets returning to their highs within a relatively short period of time. This has shortened capitalists’ memory who are now once again making imprudent loans in search of returns. This will lead to another significant downturn in the relatively near future, a probability that investors are ignoring in the belief that when it occurs the government will again come to the rescue. However, this time the government and the Federal Reserve are themselves deep in deep. It remains to be seen how this huge sovereign debt will affect the outcome.
Posted in Bailouts, Bubbles | Tagged: Bailouts, Fed, Federal Reserve, lending, loans, subprime | 1 Comment »
Posted by Steve Markowitz on March 12, 2013
A useful chart in understanding the mood of investors is the Volatility Index referred to as the VIX. This Index is the “fear gauge” for equity markets. The higher the VIX rating the greater the fear. As indicated by the chart, the fear index is at historic lows. It is therefore not surprising that equities’ values are the highest they have been since the economic meltdown began over four years ago.
In a “normal” economic environment, high equity valuations generally indicate a positive economy, suggesting strong business fundamentals. Given the length of the current economic turmoil there is something else at play. The culprit or benefactor, depending on one’s perspective, is the Federal Reserve and its policy of continuing to keep interest rates artificially low.
With returns on safe investments near zero, investors are looking for increased yields and this is resulting in increasing equity and commodity prices, i.e. more risky investments. This is a sure sign of bubble creation, precisely what the Fed desires.
With onset of the financial meltdown, the Fed decided to offset the economic downturn by printing money that when circulated increases asset values. While this led to some positive effects in the short run, when bubbles pop, and they always do, the results are very unpleasant, as we learned with the housing market.
How far has the VIX moved? As the 2008 financial crisis unfolded this index hit 80. It is currently at about 12. Imprudent financial decisions are made by investors when the index is at the fringes. Supporting this conclusion is JPMorgan’s speculative position indicator that concludes investors are taking on the most risk since the third quarter of 2007, just prior to the meltdown. In addition, with cheap money availability, investors are increasing the usage of leverage, another problematic tool when bubbles are created.
Potential bubbles are not only showing up in US equities’ markets. The Fed’s policies have incentivized bubble creation throughout the world including other stock markets and Chinese real estate. Given the inter-dependence between world markets, a collapse of any of these bubbles is problematic on an international basis.
Some well-respected financial experts are offering warnings on asset inflation and the potential for large market corrections (bubbles bursting). PIMCO’s Bill Gross, perhaps the most respected bond expert in the world, offers caution stating:
“Yet the common sense of John Law – and likewise that of Ben Bernanke – must have known that only air comes for free and is “essentially costless.” The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold. To date, central banks have been willing to accept that cost – nay – have even encouraged it.”
US equity markets have had a great run. However, such events often convince people that we are in a new economic paradigm and that the market will continue to go up. While it is possible that there remains upside, downsides are often not seen until it is too late. Prudent investors would do well to listen to experts like Bill Gross.
Posted in Bubbles, Federal Reserve | Tagged: Equities, Fed, Federal Reserve, Index, Interest, Markets, Policy bubbles, Rates, Risk, vix, Volatility | Leave a Comment »
Posted by Steve Markowitz on April 11, 2012
Yesterday, Facebook announced it was purchasing Instagram for an even $1 billion. That number is small in today’s world of trillion dollar plus deficits. However, a little digging under the covers makes the purchase price astronomical.
Instagram is a startup company started in late 2010 by Kevin Systrom and Mike Krieger, two 22-year-old Stanford University graduates. The company offers a photo sharing app for mobile devices. While the number of users for the app doubled to almost 27 million last quarter, Instagram only has 12 employees and has received no revenue to date.
There’s an old axiom that something that seems too good to be true, is in fact too good to be true. Paying $1 billion for firm with no sales and was developed in less than two years is too good to be true, but not for the sellers.
It is beginning to feel eerily similar to the Dot.com and Datacom bubble years. Both bubbles were ushered in during the second half of the 1990’s and fueled by cheap money and the promise that the world was in a new economic paradigm. As with all bubbles that preceded them, these Clinton-era bubbles ended badly for most investors. Such will be the case with the File-Sharing bubble.
This Blog has previously proffered that the cheap money policies of the Federal Reserve will have significant penalties to pay in the not-too-distant future. When the rapidly inflating bubbles pop, including the File-Sharing bubble, many investors will get burnt. Unfortunately, the bailout mentality started during the Bush administration and doubled down on by President Obama has clouded investor judgment beyond the realm of normal greed.
Posted in Bubbles | Tagged: app, Bubbles, Datacom, Dot.com, Facebook, Federal Reserve, Instagram, Krieger, Obama, photo sharing, Systrom | 3 Comments »
Posted by Steve Markowitz on April 2, 2012
The Wall Street Journal published an article titled Junk Bonds Feed a Hungry Market that tells the tale of the growing bubble in the junk-bond market. The first two paragraphs of the article tell the dangerous story:
“U.S. companies with junk credit ratings are piling into the debt markets at a record pace, seizing on some of the lowest borrowing costs in history and strong demand from investors craving higher returns.
Companies and investors both have benefited. Many corporate borrowers have been able to refinance debt at much lower rates, and others have been able to raise money cheaply for investments. And so-called junk bonds, those with below-investment-grade credit ratings, have handed investors among the best returns of any fixed-income asset this year, according to Barclays PLC. Junk bonds pay higher yields because they are considered riskier investments.”
The Journal backs its conclusion with rather ominous figures:
- 130 U.S. junk-rated companies sold $75 billion in bonds in the first quarter of 2012, significantly up from the first quarter of 2011 and the highest quarterly figure in over 30 years.
- The average yield on the junk bonds is just under 8%, the lowest rate in over 30 years.
- One company, CIT, just emerge from bankruptcy a little over two years ago. Irrespective of its poor financial performance, last month the company sold six year bonds with the yield of only 5.25%, a rate lower than this same firm paid when it sold investment-grade debt just six years ago.
The artificially low yields on junk bonds are the result of the Federal Reserve’s historically low interest rate policy. It was a similar Fed policy that lead to distortions in the mortgage and housing markets that created the housing bubble that ultimately led to the worldwide financial market. It is likely that the junk bond bubble will also pop with little notice as interest rates begin to rise. This increase will cause the face value of junk bonds to drop, potentially precipitously.
While investors are aware of the possibility of problems in the junk-bond market, when these problems occur, such investors will likely claim they were duped and seek a governmental bailout; i.e. funds from taxpayers who avoided the risky behavior. They have been taught well by recent history.
There is no such thing as a free lunch. The longer that the Federal Reserve keeps interest rates artificially low, the greater the imbalances and bubbles will become. As these imbalances grow, so too will the size of the ultimate correction. The growing bubble in the junk-bond market is
Posted in Bubbles | Tagged: Bailouts, Bubble, CIT, Fed, Federal Reserve, Junk Bonds | Leave a Comment »
Posted by Steve Markowitz on March 5, 2012
The Guardian reported on the just begun trial of Iceland’s former prime minister Geir Haarde. The former PM is accused of gross negligence that led to the collapse of the country’s three largest banks in 2008. During the bubble years, Iceland’s banks had paper values of 10 times more than the GDP of the entire country. This bubble benefited not only the banks, but many of Iceland’s 320,000 citizens who had no complaints while the bubble was rising.
It is likely that Haarde was ineffective leader. However, given that he was only in office from 2006 to 2009, in the short. It is unlikely that anyone would have skills to create Iceland’s bubble.
If every inept government official is brought to trial due to the results of their policies, the world’s courts would have little room for real criminals.
Posted in Bubbles | Tagged: Bubble, financial meltdown, Geir Haarde, Iceland, Prime Minister, Trial | Leave a Comment »
Posted by Steve Markowitz on April 19, 2011
The Federal Reserve’s policies of easy money and historically low interest rates have acted on the economy in ways not too dissimilar from a sick patient addicted morphine. While in controlled and small doses the pain killers can be a good thing, too much of it hooks the patient (economy) so that it cannot be weaned from the drug (Fed’s support). That’s where are economy seems to be stuck.
Another dangerous bi-product of the Fed’s aggressive policies is that the very low interest rates have dropped returns on safe investments to near zero. This has created a climate that pushes investors toward higher risk leading to increased speculation on commodities; one reason oil prices have skyrocket. It has also pushed the value of equities (stocks) to levels that are probably not sustainable. Such speculation inevitably leads to bubbles, as we learned a few years ago in the housing market.
The equities markets are showing signs of irrational behavior. Since January 1, 2011, the Dow Jones Industrial Average (DJIA) is up by about 5%. This fairly substantial increase has occurred even though the Middle East is in turmoil, some European countries remain at risk for default, Japan is coping with the second worst nuclear accident in history, and the U.S. deficits continues down an unsustainable path. These factors should be stressing the markets, but instead they are for the most part being ignored, a sign of irrational behavior.
The markets yesterday finally “hiccupped” with the DJIA dropping 140 points. The drop was caused by Standard and Poor’s (S&Ps) decision to give the U.S. a “negative” credit worthiness rating. S&P’s decision should have been of little surprise to anyone that follows America’s growing debt and its trajectory. Perhaps the most ironic part about yesterday’s stock market move was that it was in response to one of the bond rating agencies that rated much of the mortgage debt triple A when it was in actuality little better than junk. Well, today the markets turned once again with the DJIA up 65 points.
Equities markets are unpredictable with many of the so called experts getting it wrong more than they get it right. At the same time there are signs that often offer reasonable hints as to the future direction of the markets. Irrational behavior should never be ignored as it will ultimately be corrected by real market forces. This indicates that the equities markets are now a risky gamble. The willingness to take that risk should not be influenced by the artificially low interest rates that currently are being forced on the economy by the Fed. This too will be corrected by market forces.
Posted in Bubbles | Tagged: DJIA, Dow Jones Industrial Average, Fed, Federal Reserve, Interest Rates, Investors, Markets | Leave a Comment »
Posted by Steve Markowitz on April 12, 2011
This Bog has made many postings discussing economic bubbles, their creators and their aftermath. While bubbles hit varying industries including Dotcom, Telecom and housing, the commonality amongst them is a root cause; governmental intervention in markets and greed.
We have learned little from past bubbles given the government’s meddling in the economy since 2008 that overshadows all previous efforts. That makes the likelihood of new bubbles; i.e. the equities markets, likely.
Today’s Wall Street Journal published some interesting facts about the Telecom bubble:
- On March 10, 2000, Level 3 Communications peaked with a market capitalization of $44.45 billion.
- Also on March 20, 2000, Global Crossing was worth $45.07 billion.
- Today Global Crossing is worth only $1.52 billion and Level 3 just $2.84 billion
The $85 billion equity losses from these two companies alone should have been enough of a wakeup call for us to take steps to avoid future bubbles. Instead, the government and Fed again tried to save equity holders from a normal market correction needed after the imbalance (bubbles) occurred. The result was an even bigger bubble, the housing market. Then (and continuing now) the same knuckleheads in Washington are trying to save us from the market required corrections via the same old interventions: low interest rates and outright bailouts. Anyone believe we have seen the last of the bubbles?
Posted in Bubbles, Governmental Intervention | Tagged: Bubbles, DotCom Bubble, Global Crossing, Housing Bubble, Level 3 Communications, Telecom Bubble | Leave a Comment »
Posted by Steve Markowitz on April 11, 2011
Lee from New Jersey forwarded a piece from redstaterhetoric.com. It included a chart, posted below, indicating the negative direction of many financial metrics since Obama took office. Those on the Right will view the data as affirmation as to the failure of Obama’s policies. Those on the Left will see the same data and claim that it shows the mess Obama’s inherited form his predecessor.
The above political argument misses the bigger picture that can be clearly seen by adding one piece of data to the chart; U.S. equities values. At the same time that so many numbers shows significant economic challenges for the Country, the Dow (DJIA) is up about 35%. This divergence is a clear sign that our Progressive government, now under Obama’s watch, has succeeded in creating yet another bubble, this time in the equities markets. Given what happened to other contemporary bubbles including Dot.com, Telecom and housing, this bubble is not likely to end gracefully.
Posted in Bubbles | Tagged: Bubbles, DJIA, Dow Jones Industrial Average, Obama | Leave a Comment »