E The Next Bubble Has Started To Burst

There will always be boom and bust cycles within an economy. However, on occasion, the cycle turns into inflated bubbles. These bubbles have been fueled by too easy of monetary policies from global central banks such as the U.S. Federal Reserve, Bank of Japan, European central bank, etc. They are often further inflated through financial engineering (e.g., relaxed lending practices, exotic instruments, leverage, etc.). Finally, the greed of those having missed out on the majority of the run and believing the “hype” jump into the assets, which further drives the valuations to insane levels.

Some recent bubbles include:

  • The Dot-Com Bubble: Speculative bubble covering roughly 1997-2000
  • The Housing Bubble: Speculative bubble covering roughly 2004-2006.

The Dot-Com Bubble followed the creation and explosive growth of the Internet. The new Internet-based group of companies were often referred to as the dot-coms. Then came the late arriving companies that needed only to add an “e” prefix to their name or a “.com” to the end and their stock prices exploded higher in price. Of course, they lacked earnings, sales growth, revenues and other critical elements to maintaining viable businesses.

The Housing Bubble followed shortly thereafter. This bubble was fueled by Wall Street, mortgage brokers, Alan Greenspan (Federal Reserve) and greedy home buyers. The financial engineering created low short-term interest rates, exotic loan structures, all sorts of adjustable rate mortgages, interest-only loans and relaxed standards for mortgages. Once again, the general public arrived too late to the party and paid the price when they chased the “house flipping” craze.

So, what in this market is similar to the Dot-Com and Housing Bubbles?

Most commodities traded to their upper extremes back in 2007 on the back of Chinese demand. The growth in China, however, was something of a hoax and completely unsustainable. In a command economy like China, a country can simply put “shovels in the ground” and make its GDP whatever it wants it to be. So, that is exactly what China did.

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Ryan Lizotte 5 years ago Member's comment

Very interesting read, especially the bit on "artificial demand." Since an under-performing Chinese economy would surely affect the U.S., what should be done about it?