7/17/2013 9:45 PM ET|
5 bubbles that could pop soon
Emerging markets, Bitcoins and junk bonds are just some of the investment areas that look inflated right now. They may not blow up, but investors should be wary.
As the Federal Reserve tightens policy and emerging-market demand cools, we are going to see plenty of unsustainable growth models fail to meet Wall Street expectations and slowly come apart at the seams.
Or, if you prefer the more panicked parlance of the blogosphere . . . some bubbles are about to get popped.
Not all of these bubbles will, of course, burst in quick or dramatic fashion. Sometimes bubbles simply deflate, either steadily or slowly, until all the air inside is gone and only the lining remains.
But regardless of the pace, the risk posed by these five bubbles is fairly clear -- and investors should start to prepare accordingly.
1. Emerging markets
Thailand, Indonesia and the Philippines saw big contractions in their stock markets in June. At the time, the narrative was that investors were withdrawing money to deploy back in the U.S., but now the story has turned into a tale of China's slowdown. As evidenced most recently by weak manufacturing data, China is seeing serious challenges, and that is hurting growth potential in these markets by proxy.
Elsewhere, you have once-resilient regions like Brazil and Turkey roiling with political unrest, rattling stocks in these regions as well.
The results have been ugly indeed. Consider the iShares MSCI Brazil Index ETF (EWZ) -- a massive fund with $5.6 billion in assets and top holdings that include mega-caps Petrobras (PBR) and Vale (VALE). This Brazil ETF has lost about 25% in just two months.
It's tempting to make excuses about short-term political movements or the long-term potential of an emerging middle class in these markets. But recent turmoil shows that emerging markets in all corners of the globe are facing serious challenges.
2. Junk bonds
Junk bonds have had a phenomenal run during the past few years as a low-interest-rate environment, coupled with a hunger for yield among investors, added up to insatiable demand.
But now the winds are changing. After junk-bond yields hit an all-time low of under 5% in May, there was simply nowhere left to go but up, especially thanks to talk of tighter policy at the Federal Reserve. Junk yields already have rallied to a 2013 high at more than 6.3% in short order, with related high-yield bond investments like the SPDR Barclays Capital High Yield Bond ETF (JNK) giving up over 5% . . . even as the market has rallied since mid-May. Subsequent rises in yields will push prices down even further.
And more broadly, nations and corporations dependent on easy money -- which includes some of the emerging markets just mentioned -- will have to figure out a way to borrow with much higher rates and interest payments. That could mess with the markets at many places down the line.
Last but not least, if investors simply are looking for a modest return of 5% but begin to find it in much safer instruments like investment-grade corporate bonds in a higher-interest-rate environment . . . well, that big sucking sound will be all the air deflating from the junk-bond bubble as folks move their money to other investments that deliver yield with less risk.
3. House flipping
I remain convinced that, broadly speaking, housing is in a sustainable recovery. But I can't help but notice the return of house-flipping seminars, bidding wars and the idea that a house is an investment that can make a quick profit with minimal risk.
Consider that house flipping in California is back to 2005 levels, according to a recent Wall Street Journal report. Not good.
Thanks to very tight supply and weak demand, the dynamics have strongly favored sellers -- for now. That has allowed speculators to creep in and start treating real estate like a short-term investment again.
Properties across the U.S. differ widely, and each area has its own challenges and opportunities. But it is increasingly clear that the areas hit hardest by the housing downturn could be ground zero for another real estate bubble should the flippers throw in the towel. Consider that more than 50% of real estate transactions in Las Vegas, for instance, continue to be all-cash purchases, and a staggering 1 in 10 sales are to foreign investors.
Regions that have stabilized thanks to a slowly mending economy and organic demand are one thing. But house-flippers in speculative markets better watch out.
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But today fewer Americans are working full time than when Obama took office and a record number of Americans have fallen into poverty. Almost half of New York City lives below the poverty line. Over 16 million more Americans are now on food stamps. But the president has spent more time playing golf with Tiger Woods and raising money with Wall Street millionaires – his presidential campaigns have raised more money from Wall Street than any in history – than focusing concern for the poor.
The President's greatest passion is clearly for more gun control. While his hometown of Chicago has draconian gun control laws, it is a slaughterhouse of gun violence and still the president is unable to muster support for new legislation. Every time he talks about how 90% of the public supports his position, it only makes him look more impotent. This is a President who can't even pass legislation with 90% public support?
Obamacare remains his signature achievement and it is likely to be the program for which he will be most judged by history. At the moment, like Obama's foreign policy, it's a chaotic mess, a policy that appears to have timid support from those charged with its execution.
Looming over all this is a president who doesn't seem to care what anyone thinks. No doubt he feels vindicated by re-election and that's understandable, perhaps inevitable. But if re-election is validity enough, then President Bush's victory proved that the Iraq war was a success. Perhaps Obama will wake up and surprise us with a new agenda and renewed engagement. Perhaps it's just the summer heat and the inevitable realization that promising more than you can deliver only works in short term transactions and eight years is a long time.
One thing is certain: the Obama years will be judged by results, not the quality of his excuses. You can't ask to be granted the chance to become a transformational figure in world history, be given that opportunity, and then hope that you can blame anyone else when Hope didn't work out.
These are the Obama years. How's it working out?
The United States' OVER-DEPENDENCE on mainland China is worsening. The near $17 trillion National Debt makes it impossible for the federal government to make interest payments on Treasury bonds if the interest rates are high. The Federal Reserve Bank's QE was supposed to drive long term rates down. The 10-year was as low as 1.47% in 2012. The bond investors, tired of the low yields, have been forcing the rate up. When it rose to 2.7% several weeks ago, Ben Bernanke became flustered.
It is no coincidence that right after President Xi Jinping came to visit President Obama, China expanded its Treasury holdings to $1.3 trillion. This week, the 10-year has ventured down to the 2.4's, but it sits at 2.53%, as of today. If 2.4% is as low as the 10-year gets from this Chinese favor, this is not much help for the Obama Administration.
It is silly that economics writers keep telling us that the Fed may raise interest rates. The Fed is not the force driving interest rates up. The BOND MARKET itself has been in a BUBBLE. When yields were at rock bottom, the private investor had little reason to want them. The bond market bubble is probably not through deflating, since yields are still nowhere near historically normal levels.
China and Japan are going to be hurt. They don't get to wait until the bond bubble completely deflates. Both countries are eating American inflation at a time when their own inflation is already high. China is begging for another round of workers' riots from increased food prices.
Remember, when interest rates rise, they rise against the will of the Fed!
This article was right on. We are now at the top of the inflationary cycle, from the QE''s, and are about to enter a new environment of investing. The all time highs should tell everyone there is less room above than bellow. Look for undervalued investments, and other companies that will benefit from rising interest rates. The deflationary cycle is about to start. Best of luck to you all.
I am incensed about house flipping and it can be easily corrected:
1. Shut down the financial incentive to flip a home through taxation tied to how often and under what conditions a house is sold.
2. Flipping, as we have all seen, kills the American Dream for middle and lower classes
3. While I am supportive of free enterprise, this particular area is one that destabilizes our economy and is regressive in nature.
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