8 Bubble Markets Investors Are Watching Now
There's always talk of a bubble somewhere in the economy. Here's what investors are watching now.
Economic bubbles work the same way, more or less. Although the bailout in Cyprus (See: Cyprus: Has the Next Phase of the Global Crisis Arrived?) and the related eurozone crisis are the predominant concerns of traders and investors around the world today, the global markets are also littered with various bubbles or bubble-like situations that threaten market stability. Here are eight bubbles stealing the headlines right now.
China’s Real Estate
Something stinks in China, and it’s not the chou doufu. As it turns out, the second-largest economy in the world and America’s number-one creditor is stuck in its own steaming bowl of fiscal woe.
Take Zhengzhou, one of the country’s most populated provinces with a housing district that stretches mile after mile with high-rise condos, apartments, and subdivisions. But rather than a city bustling with people and activity, it looks more like an episode of The Walking Dead. This ghost town’s apocalypse wasn’t started by flesh-eating zombies but, arguably, an equally terrorizing property bubble that threatens to be the worst in human history.
A rising middle class of Chinese citizens, eager to invest their money, have been turning to real estate. Unlike national banks and the stock market, housing has traditionally offered a predictable and lucrative option with returns on investments doubling and even tripling. Hence, the building boom that’s since created entire cities -- between 12 to 24 every year -- with no one to live in them.
China’s government has already sunk $2 trillion on getting these ghost cities built, which is especially bad news for a country with 20-30% of its economy tied to the real estate market. Perhaps it has a lesson or two to learn from its own debtor when it comes to throwing good money after bad.
Many analysts, including Gillem Tulloch, the Managing Director of Forensic Asia, have warned that this bubble is a catastrophe in the making. Perhaps even more alarming is the fact that Wang Shi, the owner of China's largest real estate enterprise, China Vanke (SHE:200002), is certain that there is indeed a bubble and that its popping would be devastating. (Both men were interviewed by 60 Minutes.) If the bubble bursts, there's major trouble in store for China: Market watchers say the new middle class could see their life savings evaporate. Some 50 million construction workers could be out of a job. In the face of overwhelming debt and incomplete infrastructure projects, social unrest could take hold of the nation. Political upheaval could spread across the country and produce something akin to the Arab Spring. Needless to say, this would affect global markets, driving the world's economy into recession.
Whenever the question was raised as to the “real cost of a college education,” it was traditionally referring to a student’s personal debt burden. But since more and more graduates have become delinquent -- with student loan debt on track to double that of our nation’s credit card debt -- the weight of that load has shifted to the broader economy. Outstanding money owed for both federal and private student loans is so staggering in fact, it’s earned its own debt clock, which is currently ticking at over $1 trillion.
Struggling to play catch-up with every dollar of earned income means graduates have less money to spend on the things their parents and grandparents had the freedom to buy at their age. This means industries and institutions catering to the 25- to 50-year-old demographic -- such as durable consumer goods and the already heavy-hit real estate market -- are likely to feel the pinch. Long term, the stock market as a whole will also find less people willing and able to invest.
Real estate, that once-guaranteed ticket to the middle class, is now the very thing keeping them out. Gleaning an education in life while backpacking across Europe is starting to look better and better.
Fair weather investors who fled the stock market in droves when things started to go south, ran straight to the safe arms of government bonds. But now that the sun is once again shining on Wall Street -- with the Dow (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX) at or near record highs -- the exodus is happening on the other end.
In the space of three months, bonds have sold off appreciably. One could argue (and many have) that the bond market’s bubble has burst. Others still, say there was no bubble in the first place. The argument is that people will always buy bonds, even if they may gripe about the low yield because at least that yield is guaranteed.
These folks are not counting on declining interest rates at which time they can flip their bonds for profit. They’re looking for a sure(r) thing, and that is a liquid US Treasury. Even if the country is facing a trillion-dollar deficit, its central bank is not likely to ever go into default. The same thing can’t be said for a public corporation in bankruptcy.
The App Market
An argument comparing the similarities between the rise and fall of the auto and app industries has already been made. “Mobile” puns aside, just look at their respective rates of adoption and opportunities for entrepreneurial capitalization during each one’s historical heyday. The turn of the 20th century saw the rapid evolution of the American motor vehicle and, right now, the smartphone app seems to have hopped on a kindred road to prosperity.
But just as that road was flooded with hundreds of early car manufacturers that merged into a few big ones, so is it saturated for hundreds of thousands of app developers fighting not to get pushed onto the shoulder. Dominating the road is Facebook (NASDAQ:FB), which has been installed on an astounding 76% of US phones, but Google’s (NASDAQ:GOOG) catalog of over 700,000 apps counts five of the top six apps in the country with Maps, Google Play, Google Search, Gmail, and YouTube.
Trailing behind in popularity is Apple’s (NASDAQ:AAPL) App Store followed by offerings from Microsoft (NASDAQ:MSFT), BlackBerry (NASDAQ:BBRY), and Amazon (NASDAQ:AMZN).
Though apps are expected to bring in $25 billion in global revenue, that figure quickly starts to get eaten up by continuously rising advertising rates and ongoing maintenance and design -- not to mention the costs of development and launch. And even for successful app outlets like San Francisco-based TinyCo Inc., “[E]very day is a battle to acquire users,” said its manager of strategic partnerships.
Is the writing on the wall? Could we be headed toward a multi-billion-dollar government bailout of the app industry? Lack of lobbyists aside, apps would probably first have to prove profitable for either smartphone manufacturers or developers in the first place.
While the rest of the American economy limps pathetically along the fiscal field, our institution of professional athletics continues to whiz by into an end zone of ridiculous wealth and profit.
There’s the NFL’s 10-year labor and media deal that will net an annual $2 billion. New 8-year deals with ESPN (NYSE:DIS), Fox (NASDAQ:NWS), and Turner Broadcasting (NYSE:TWX) will make the MLB $12.4 billion. The LA Dodgers inked a $7-$8 billion 25-year deal with Time Warner Cable’s (NYSE:TWC) SportsNet LA. Fox Sports Southwest is spending $3 billion on the Texas Rangers for two decades of TV rights. Even the Houston Astros, with a 55-107, 2012 season record, got Comcast (NASDAQ:CMCSA) to shell out $80 million in annual TV rights under a $3.2 billion 20-year deal with a large equity stake in the network to boot.
Remember when “most valuable player” referred to athletic ability?
The funny part is that this money is largely coming from cable subscribers, whether they're sports fans or not. And if these non-enthusiasts get hip to increased subscriber fees being levied upon them for programming they don’t watch, they may just turn to a bevy of a la carte options (most of them streaming from online sites) to get TV content.
A trend of activist investing is, no doubt, upon us. More and more of those Schedule 13Ds are being filed with the SEC as investors snatch up a minimum of 5% of a company’s shares. Those with millions and billions are buying their way into the boardroom in an attempt to effect corporate governance from within -- be it to adjust executive compensation, weigh in on a potential merger, or simply eke out more stock value for shareholders.
Big in the news has been the heated short sale battle over Herbalife (NYSE:HLF) between Bill Ackman and Carl Icahn, bringing a lot of attention to the idea of the activist investor. Also making waves is David Einhorn, who has attracted attention for calling out Apple on its stockpiles of cash, but also with comments that he is openly shorting Chipotle Mexican Grill (NYSE:CMG).
According to 24/7 Wall St., this phenomenon is butting into bubble territory and, as such, has appropriately spawned a term that may soon make its way into the stock market bible. And the financial website warns we should beware of it as the activist bubble could “end badly for the public.” Using the corporate Fort Knox that is General Electric (NYSE:GE) as an example, 24/7 Wall St. speculates that well-meaning activists who may have pried their way in during the recession to keep dividends in tact would have done the company an enormous disservice since those cuts freed up the necessary capital to save tens of thousands of jobs.
Housing Bubble 2.0
We are coming up on six years since the 2007 housing meltdown and talk is escalating of another bubble. The total number of sales in 2012 was the highest in five years, with the annual price for existing homes jumping to their highest level since 2005 and the median price of a home up 11.5% in December 2012 for the same period in 2011. Citing artificially low interest rates and rampant speculation, David Stockman, the former Director of Office Management and Budget for President Reagan, says we’re in the midst of a housing bubble all too familar.
According to Stockman, “It’s happening in the most speculative sub-prime markets, where massive amounts of ‘fast money’ are rolling in to buy, to rent, on a speculative basis for a quick trade…And as soon as they conclude prices have moved high enough, they’ll be gone as fast as they came.” This “fast money” refers to investment from hedge fund and private equity firms to build new homes for sale or for rent. For example, the global investment firm Blackstone (NYSE:BX) has spent over $2.5 billion on 16,000 homes to be rented. Such investment benefits big homebuilders like D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM), and Lennar (NYSE:LEN), as well as home supplies stores like Home Depot (NYSE:HD) more than it does consumers.
He claims two main reasons why we’re not seeing a real recovery: first time buyers are missing, and so are trade-up buyers. With 7.9% unemployment and skyrocketing student debt, these buyers are unlikely to return to the market.
And what will trigger the bubble’s eventual pop? According to Stockman, the pop will come as soon as interest rates rise, because the Fed’s zero interest-rate policy and quantitative easing can’t last forever.
Midwest Farm Bubble
In 2011, economist and best-selling author Robert Shiller said farmland was his “favorite dark-horse bubble candidate for the next decade or so.” And yet, two years later, he is unsure whether the dark horse has materialized, as he thinks the market conditions are missing a key component of being a bubble. As he said to CNBC, “In my view of a bubble, it’s something that gets people excited. Well, some people are excited. But most people don’t even know about it.”
Another economist, Steve Taff of the University of Minnesota Extension, sees potential for a bubble, but is also uncertain. Minnesota farmland prices have increased for the past 20 years, peaking at a state average of $3,500 per acre in 2010. As he said to AgWeb, “There are two ‘drivers’ for high land prices: high corn prices and low interest rates.” If crop prices continue to increase and interest rates on Treasury bills remain low, Taff foresees land prices continuing to increase. This will make buying high-priced land more attractive, with more revenue from corn and other crops, and more ability to receive and pay off loans.
Like Stockman, Taff said one of the biggest problems with high prices is that fewer farmers are able to enter the market, especially young farmers whom many banks won’t finance. Only 1% of Minnesota farmland is sold per year, with 50% leased.
The 2012 Iowa Farm and Rural Life Poll, in its 30th year, reveals more concern: 68% of farmers said that they believed farmland is overvalued, while 48% agreed that “the farmland market is in a bubble that will eventually burst and lead to major drops in values.” Reflecting the problem of young people unable to enter the market, the average participant in the poll was 64 years old.
-- With text and research by Josh Wolonick
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