Ten Bubbles in the Making

The Business Insider, Sept. 14, 2009:

Oneyear after America's brush with economic catastrophe, there's plenty oflooking back at the bubbles that caused financial chaos.

But what's next?

There are surely dangerous economic bubbles forming as we speak. As Alan Greenspan warned this week,"They [financial crises] are all different, but they have onefundamental source," he said. "That is the unquenchable capability ofhuman beings when confronted with long periods of prosperity to presumethat it will continue."

The trick, of course, is spotting them. By definition, most people don't spot a bubble before they form and burst.

Here's 10 for which you should be on alert:

1. China bubbleespite the weak global economy, the Chinese stock market has soaredlike crazy this year. But many believe the rally has been driven purelyby government-supplied liquidity, rather than fundamentals. The fear isthat companies are flush with cash, but have little "real" to do withthe cash, so they're parking it in the stock market casino. The Chinesereal estate market appears to be on a similar trajectory.

2. Green bubble:Green has been everywhere. With observers saying the "Age of Cleantechand Biotech" will be the next major economic revolution, and Washingtonpouring billions of dollars into alternative energy projects, you'dthink a bubble would have already formed. But, as we noted this spring,it did not, at least from an investment perspective.

Still,as the economic recovery takes shape, alternative energy could seeexcess investment on hopes of big future returns. There's plenty ofhype left, and if investors regain the cash to get in the game, could green become the next internet or housing bubble?

3. Gold bubble: Gold prices just keep going up. They've risen for seven straight years, recently breaking $1,000 per ounce. 

Isit a bubble? Right now, it doesn't look too bad. Gold is good in bothinflationary and deflationary periods, as it holds wealth tangibly.And, as the Telegraph notes, there's real demand, especially from China.

Butwith some predicting a doubling of prices to $2,000 an ounce, too manypeople could jump in and spike the real value of the precious metal.The "rise forever" mentality usually means trouble.

4. Federal Reserve bubble: Is the Fed saving the financial system or creating another dangerous credit bubble by snapping up mortgage-backed securities?

At first glance, the Fed's effort to clean up mortgage-backed securities is a winner. But, as Heidi Moore wrote for Slate's The Big Money,the Fed is actually creating a bubble similar to the one it's trying todo damage control on. By eagerly trying to save banks and stabilize thehousing market, Washington is taking on too much: $1.25 trillionof mortgaged-backed securities, including both the original toxicassets and products of foreclosures to come. So who would bail the Fedout? You.

Click here to view the 10 bubbles in the make slide show.

5. Trash stock bubble: There's a rush to trash going on. Stocks like Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even GM made big runs in August -- trading in trash financials made up nearly one-third of NYSE's August volume. 

Sowhy are people buying junk? Charlie Gasparino says shares of junkfinancials -- companies like Fannie, Freddie, AIG, Citi and Bank ofAmerica -- are being pushed up by a short squeeze. The Wall Street Journal suspectsits high frequency traders. And others say its retail speculation andday traders getting their way while Wall Street went on vacation.

6. Education bubble:More people are going back to college and taking on huge debt to do it,despite questions about what the degree is really worth.

Lastyear, the amount borrowed by students and received by schools grew some25% over the previous year, to $75.1 billion. That's a huge amount,especially with weak, low-paying job prospects for graduates in thiseconomy.

As we've noted,all this student loan debt is crazy. Despite the desire to see moresubsidization of college, we suspect there will be a collapse instudent loan debt availability and desire to take on new debt.

Short of telling kids not to go to college, something's going to give.

The pop may be starting already. As Bloomberg reports, as many as one-third of all private colleges surveyedsaid they expected enrollment to drop in the next academic year. Andalmost 40 percent of those colleges said some of their students droppedout due to personal economic reasons and a quarter said full-timeattendees switched to part time. Half said families had to cut backtheir expected contributions as the value of college savings plansdropped 21 percent last year.

7. Subprime bubble, 2.0:What are banks doing with all those subprime mortgages? They'rerepackaging with a higher rating -- "re-securitization of real estatemortgage investment conduits" -- and selling them.

As we've noted,it's a plan nearly identical to the complicated investment packages ofthe financial crisis a year ago. That being said, the problem was notstrictly securitization, but the underlying housing bubble. So thereturn of complicated products isn't necessarily the end of the world.

8. Life insurance securitization bubble:In its search for new profits, Wall Street is planning on securitizing“life settlements" -- policies that the sick and elderly can sell forcash while they're alive -- much like it did subprime mortgages. The New York Times warns that we could be looking at subprime all over again.

Maybe. As we've noted,it wasn't securitization that caused the financial meltdown. It was thebursting of the housing bubble. Yes, there was a feedback loop, wherebysecuritization allowed more money to flow towards housing, but it seemsunlikely that "life settlements" would get big enough to infect allportions of the financial world.

9. Commercial real estate bubble: This bubble is already hissing, if not popping outright.

Whilethe economy is improving and some home sales are slowly coming back,the commercial real estate market could get far worse.

As The New York Times reports,"Even though industry lobbyists were able to persuade Congress toextend a loan program aimed at prodding the stalled securitizationmarket back to life, several analysts said it was unlikely to head offa spate of defaults, foreclosures and bankruptcies that could surpassthe devastating real estate crash of the early 1990s."

As UPI notes, commercialmortgage defaults could reach 4.1 percent by the end of the year, upfrom 2.25 percent in the first quarter, and Real Capital Analyticsestimates commercial property loans worth $83 billion have beeninvolved in default, foreclosure or bankruptcy in 2009.

Badly hit will likely be malls. "Thenext financial tsunami to hit will be the widespread failure ofshopping center mortgages," says Peter Monroe, co-chair of REOMAC, anot for profit trade association to CNBC."Half a trillion dollars of commercial loans financed on historicallylow rates, are due for refinancing in the next three years," saysMonroe. "The negative impact of these shopping center mortgages isenormous."

10. Emerging market bubble: It's not just China. Risk-tolerant investors are bidding up emerging market sharesto valuations not seen in 9 years. With an average PE of 20x, they'renot in bubble territory just yet, but watch for things to get out ofhand.