Yes it is a bubble!

 

Most economists you meet or read tell you that the US problem is worse – much worse- than the Euro problem. Many of us think that the Americans have pushed the dollar too far and it has to fail.

The American debt, the American bank’s date and the NINJA credit cards, NINJA educational loans, etc. have not yet hit. Once all this hit, the so called American growth story will vanish.

The US Gilts and T Bills cannot permanently be at 2% p.a. when inflation in the US is at 5%p.a. – this is not GROWTH, this is just a realistic adjustment to the helicopter Ben’s reckless QE and printing…:-)

Gold cannot keep going up if Americans start selling – simple.

The Chinese Real Estate bubble will also take its toll on the Chinese banking….

ULIPs will come home to roost on the balance sheets of life insurance companies (it is difficult to imagine how many proposals are being surrendered BECAUSE they are 5 years old! So all that assumption of 30 years premium is a nightmare gone absolutely wrong.

The Pound and the Euro will have to get realistic about what is happening in Europe and UK in particular…

The Japanese story is still not fully understood….

What is a bubble?

When the runaway valuation is not backed by cash flows to sustain it at meaningful levels, it is a bubble…now will somebody tell me why these are not bubbles please?

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5 Responses to “Yes it is a bubble!”

  1. What about India ? How will our ‘real estate/gold’ can only go up mentality take a hit ?

  2. Subra Sir,
    Gold is not a bubble because dollar printing by Bernanke will decrease the value of dollar, have inflation and help gold to retain its value in dollar terms. Though considering inflation, investors will lose out on gold but on nominal terms, they would not.

    Anon,
    The notion “real estate can go up” has already taken a hit. Real estate developers (and banks) are trying foolish things to keep the prices up. Now NRI deposit rates are freed so NRI won’t be interested in investing in real estate. One major source of demand of real estate would dry up. It wont take even 6 months from now for real estate market to crash.

  3. While we can define a “Bubble” in a number of ways, I see a bubbles forming in 2 possible ways. One is the traditional way..in which asset valuations rise out of proportion to the actual cash flow (mainly due to perceptions). The other way, which happens less frequently, is when actual past cash flows collapse and no longer support current asset valuations. For example, when a company can no longer sustain previous years earnings, its stock price suddenly looks highly overvalued and crashes..similar to a bubble burst.

    A third form is also possible…which I’ve begun to see as fraud. This form started in the late 90s by corporates in the US and Govts in the EU in the early 2000s. In this form, the involved entity intentionally accepts lower cash flow against an asset/liability for a temporary period of time. This puts that asset automatically in bubble territory. When that temporary period ends, the bubble automatically bursts.
    In the US, this was done by banks by intentionally accepting lower EMIs (interest-only, or even interest-accretive loans) for large loans. NINJA loans are exactly that. This was done with teaser rates for initial 2/3 years. When the rates reset, the borrower could no longer pay the increased EMI and the loan automatically went bad (bursts!). Interestingly, this was done intentionally… for various reasons… least of which was to screw the borrower.

    In the EU, govts hid their liabilities, showed low deficits, high tax collection to boost their bond sales. Again…these govt officials knew their own lies and that it was only a matter of time before the truth came out into the open. Once the market came to know about the hidden liabilities, unsustainable deficits, the countries bonds collapsed (bubble burst). Yet the govts did this intentionally, again, for various reasons…least of which was to screw the lender banks!

    Both these cases are examples where the bubbles were engineered by vested interests to make a profit. This is one step ahead of normal bubbles which happen due to a self-reinforcing market action. This is not even information asymmetry where some people take advantage of insider information to make profit. The best equivalent example of this is: Take insurance against your neighbours house catching fire (hypothetically), then set fire to it to claim it!

    The best part about all this is that the central banks, instead of letting the bubbles fully collapse, are instead handing money in a literally free for all (0% interest!) to prolong and (try to) sustain the bubbles!

    🙂 Happy investing in these crazy whirlpools that will only proliferate in 2012

  4. Hi subra,
    I appreciate the economic forces you’re talking. i also agree to LuckyOye’s observations.

    however, i feel we are (at least i am) missing the links of money to political and military forces. we are looking money in isolation…

    recently saw “Apologies Of An Economic Hitman” :
    http://www.youtube.com/watch?v=X-ABSA1C9OY&feature=youtube_gdata_player

    this and other things are slowly making me believe that economics is highly influenced by other forces as well…

  5. ULIPS r most missold products!
    plz any person with sound mind DO NOT BUY ULIPS!
    stay away from them!
    they hv high commissions 30-40%even more, highest guarantee NAVs r worst products, stay away!

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