Entering The Bubble 2.0

Posted by: David Schwedel on Tuesday, October 20, 2015

Financial Bubble 2.0

There has been a great deal of discussion if we are heading for another “financial bubble”.  While this is discomforting to think about, I would say that we have entered the bubble.  

From Miami to New York to Los Angeles prices for real estate are beyond where they were pre-recession times. That does not bode well for all of us.  Talk to any real estate person, and they will immediately begin to rationalize that, “This time it’s different”.  Is it, really? 

The argument that foreign buyers with large amounts of cash are “parking” their money in the US as a “safe haven” makes sense on some level.  Once those buyers start to get tired of the carrying costs – watch out.  Add to the fact that the primary driver of some of the greatest wealth creation in the past decade has come from the commodity markets, it gives you pause.

The price of oil, gas and coal have all plummeted, and not for the reasons the environmental folks are touting.  It has to do with the slow down of China.  Interest rates are so low, for so long, that most people forget that interest rates were in the 5% - 6% range in 2006 & ‘07, and dropped into the 1-1 ½% range in 2008.  With rates this low, it was only a matter of time for the bubble to begin again. 

Today, the trend in non-essential lending at brokerage firms has been rising.  These are loans against a client’s portfolio where the funds are used to pay for a vacation or a second asset.  There are more than $12 trillion of client accounts at various brokerage firms.  

It is time to raise interest rates a bit.  Higher rates could signal the Fed has greater faith in the ability of the economy to bear them. Waiting to see what happens with growth in China and Europe is key, but all that delay is “pumping more air” into the bubble.  Let’s just hope this time the Fed can help let the air out slowly vs another crash scenario.

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