Monday, June 27, 2005

No Way To Delay, There's Trouble Comin' Everday

The public debt is going through the roof, the price of oil hit 60 dollars a barrel today, the price of housing is up 30 percent here in So Cal ... let's see, real wages are down and the war in Iraq is boomin' on. What else can go wrong? How about a bubble burst?

Just take a peek at this article from MarketWatch and see if your troubles could get any worse:

Big Burst in the Making
June 26, 2005

One thing I know about the real-estate market is that it moves in grand cycles, from bubble to bust and back.

I've also discovered that many people actually love blowing bubbles, until they bust, like party balloons. I hear it everywhere, from folks in Washington, Wall Street, Corporate America and cable-TV talking heads. Even the chairman of the Federal Reserve blew a little froth into the bubble.

But here's some new insight for you: This isn't a normal domestic real-estate bubble/bust cycle. We may be in an extraordinary global economic mega-bubble and real estate is just one of its many components.

If this mega-bubble exists, and if it bursts, the $8 trillion in wealth lost in the 2000-2002 bear market will be peanuts.

What do you think? I've put together a mega-bubble poll to aggregate the collective mindset. You get to decide if we're in a mega-bubble and when it will explode.

The poll below helps you focus on 20 mini-bubbles that potentially make up a global mega-bubble. Score each on a scale of 1 to 5, with 1 being the least likelihood of a bubble and 5 meaning there is a definite bubble about to burst.

If your total is 50 points or more, you probably see a mega-bubble dead ahead. Prepare accordingly. If you're close to 100 points, consider a very conservative strategy. Remember, history and behavioral finance experts tell us that most investors can't see bubbles when they're in them. And if they do see, they don't act on them till it's too late.

Send your score and any comments to PaulBFarrell(at)

Do These Add Up to a Mega-Bubble?

1. Real-estate bubble
CLUES: Speculators are driving prices up. Lenders offer cheap money, short-term loans. Home-equity loans fund short-term spending. Fed chairman sees minimal froth.

2. Energy and oil bubble
CLUES: Crude price hits another record. Political turmoil in oil-producing nations. Consumers buy gas-guzzling vehicles at record pace. GM and Ford are in trouble.

3. Foreign trade deficit
CLUES: Monthly deficits top $50 billion. This year's deficit is on track to beat 2004's $617 billion.

4. Federal budget deficit
CLUES: Federal debt is now $7.8 trillion. Add another $400 billion to the federal deficit this year.

5. Underfunded corporate pensions
CLUES: Airlines, auto makers and other manufacturers are heavily burdened. The government—with taxpayer dollars -- may have to step in to cover the tab.

6. Local-government pension deficits
CLUES: A near $400 billion mess draining local taxpayer resources.

7. Weak U.S. dollar
CLUES: Fears that China and other nations will replace dollar reserves with euros. Warren Buffett now betting $20 billion on foreign currency hedging.

8. Social Security deficit
CLUES: Must cut benefits or raise taxes. Politicians hate both, so it'll get worse.

9. Health-care insurance costs
CLUES: Burden shifting to employees. Costs are above inflation. 43 million Americans are uninsured.

10. Medicare deficit
CLUES: Going broke faster than Social Security. Prescription-drug benefit added an unfunded $8.1 trillion to the system. Long-term estimates for deficit are above $36.6 trillion.

11. Personal savings shortfall
CLUES: We're consumers, not savers. National savings rate is zero, down from 8% two decades ago. Average household net worth is less than $15,000, excluding home equity.

12. Consumer-debt bubble
CLUES: We're living beyond our means. Consumer debt above $2 trillion. Interest paid per household, as a percentage of household income, is at an all-time high 13%. Personal bankruptcies are rising.

13. War and military defense deficit
CLUES: Iraq and Afghanistan war costs are above $200 billion a year, $2 trillion a decade.

14. Homeland insecurity
CLUES: Minimal legislation to protect ports and chemical plants. Federal budget even cut border patrol 90%. We are vulnerable.

15. Class gap widening
CLUES: The super-rich and CEOs get increasing share of wealth, ownership and tax cuts.

16. Governmental behavior
CLUES: Both parties in Congress act like teenagers on a spending spree with stolen credit cards. By not using the veto, the administration acts like a parent who needs Nanny 911.

17. International credibility
CLUES: Image problems: Post-9/11 imperialism, WMDs, Abu Ghraib, Guantanamo Bay and more.

18. Junk mailings
CLUES: Mail solicitations on the rise for credit cards and "hot stock" newsletters.

19. New "Mad Money" cable show
CLUES: Frantic, manic entertainment; replay of 1990s irrational exuberance.

20. Numerous key mini-bubbles
CLUES: Environment, technology, science, education, outsourcing, jobs, etc.

Some shit, huh? And now you find out your dog has fleas, too. Sad.


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