The Next Bubble Is Here. Have You Bought In?

by Gary North

I have identified the next bubble. It has already begun. It is in full swing.

Investors want to identify the next big bubble. Some investors want to buy in now, maybe using borrowed money (margin loans) to make a killing. They are confident that they will sell out near the top. They won’t. Other investors just want to avoid getting trapped. They prefer to let the first group bear the uncertainty of profiting from a bubble sector.

The trouble with investment bubbles is that nobody seems to recognize them when they are making investors rich. Alan Greenspan denied that it is possible for central bankers to identify a bubble. He gave a speech in 2002, before his easy money policies had created the final stage of the worldwide housing bubble. He insisted on the following:

We at the Federal Reserve considered a number of issues related to asset bubbles – that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact – that is, when its bursting confirmed its existence.

Moreover, it was far from obvious that bubbles, even if identified early, could be preempted short of the central bank inducing a substantial contraction in economic activity – the very outcome we would be seeking to avoid.

First, he was blind to what the FED’s policies had done in the second half of the 1990′s to create the dot-com bubble. Second, he was equally blind to what these same expansionist policies were doing to the housing market – policies adopted in mid-2000, in response to the bursting of the dot-com bubble.

He was incorrect. Some of us did see that the dot-com bubble was a bubble. I told my subscribers in February and March of 2000 that the NASDAQ was a bubble at a price-earnings ratio of 206. The NASDAQ burst the week my second warning arrived in the mail.

With respect to the housing bubble, in late 2005, I wrote an article on “Surreal Estate on the San Andreas Fault,” which warned against the coming bursting of the real estate bubble. It was clear to me what Greenspan had done to the economy.

If you remember the S&L crisis of the mid-1980s, you have some indication of what is coming. The S&L crisis in Texas put a squeeze on the economy in Texas. Banks got nasty. They stopped making new loans. Yet the S&Ls were legally not banks. They were a second capital market. Today, the banks have become S&Ls. They have tied their loan portfolios to the housing market.

I think a squeeze is coming that will affect the entire banking system. The madness of bankers has become unprecedented. They have forgotten about loan diversification. They have been caught up in Greenspan’s counter-cyclical policy of lowering the federal funds rate. Now this policy is being reversed. Rates are climbing. This will contract the loan market. Banks will wind up sitting on top of bad loans of all kinds because the American economy is now housing-sale driven.

You may think that you are shielded. But your banker is not shielded. You may not deal with bankers. But your employer does.

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