No Grasshoppers, “Bubbles” is not an old flame from college or a stripper from a racey night-club. It refers to the mega-economic bubbles that rule our lives. Don’t get caught when the economic bubble pops.
I know. I know. What the hell is he talking about? My best example is the “technology” bubble that existing in the 1990’s. Any company was involved in computers, software, telephones or digital products was part of the “tech” bubble. The rationale was that tech-stock was visionary and could only go up. An example would be Cisco Systems which makes expensive switching and storage products for computers. I bought one share of Cisco in 1998 for the equivalent of $12/share. There was some logic in buying the stock. Quality. Strategic Products. But the financial guidelines stunk. The price/earnings ratio was awful. Growth of 50-60% per year could not be sustained. The key indicator that a financial bubble existed was that financial logic was ignored and there was a buying frenzy among the yuppie crowd. I sold my one share of Cisco for $125/share in January, 2000. One year later, Cisco was at $10/share. I was fortunate to sell before the bubble burst. Today, 5 years later, Cisco is selling at $13/share. Imagine the number for years it is going to take for Cisco to get back to $125/share! Decades I’m sure.
You could argue that the technology bubble of the 1990’s was an aberration, not to be repeated. I’d argue that there are lots of bubbles out there and you should beware of getting caught in the “pop”.
This blog entry is meant to be short and crisp. I don’t have enough space to talk about all the bubbles but let me mention a few.
The real-estate bubble. Low interest rates have encouraged people to finance bigger houses carrying debt up to their eyeballs. As interest rates rise (and they are rising), lots of people are going to experience problems with their debt repayment and lose their homes. The real-estate bubble will pop.
The energy bubble. Gas prices are over $3.00 per gallon. Home heating bills are expected to soar 40-50% this winter. Any investment in energy seems like a winner. As China slows its growth. As people buy smaller cars. As people stop spending as much money at the pumps, gas prices will drop. There will be a pop.
The social security program is a bubble. It can’t possible handle all future retirees.
Pensions unfunded by big corporations is a bubble. Wait until General Motors and Ford have their pension liability pop.
Healthcare costs are a bubble. I don’t know if they will pop, but something has to change.
Consumer debt is bubble. Totally consumer debt I believe is $8,000 for every man, woman and child in America.
Federal debt is unbelieveably high and we are borrowing from the rest of the world. I don’t know if you’d call that a bubble, just insanity.
And the list goes on. It means you have to live smartly. When an economic bubble bursts, you want to get out of the way. Bubbles are part of the world we live in.
Love,
Dad