Holiday Shopping
before the
Next Bubble
November 9, 2009
If you were one of those incredulous people in the late '90s who watched fortunes come and go during the dotcom boom and bust, you know how bubbles happen. You probably predicted that home values could not continue to climb at such a spectacular rate and that investors could not continue to flip properties and make millions by putting virtually no money down. You knew something was wrong. And your keen sense was telling you then to fall out of line, be smart and stay away from the party.
But what about now? Are you getting that prickly feeling that another bubble is out there somewhere getting ready to burst?
Enter Nouriel Roubini, the economist from NYU who's also had stints at Yale, the Federal Reserve, the World Bank, the International Monetary Fund and the Bank of Israel. He predicted the current recession in no uncertain terms back in 2005, emphasizing that home owners would default on mortgages that would risk trillions of dollars in mortgage-backed securities. The next bubble in the making, he claims, is the asset bubble. According to Roubini today's sudden rallying of stocks and high-risk equities does not square with a drastically weakened US dollar or a low prime interest rate. By holding the interest rate down, the Feds are allowing the next bubble to fester.
Our credit card nation will watch the bigger players take the first tumble. Foreign investors who've swooped in to capitalize on the low dollar and negative interest rates will, according to Roubini, trigger a sell-off and another massive economic setback.
"A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments." - Nouriel Roubini sip it
Rogers: "Roubini Wrong, No Gold Bubble" by Forrest Jones sip it
As global US economic policies force countries around the world to follow questionable practices by lowering interest rates and capping their own currency's runaway appreciation, the already tenuous economic situation in the US only grows increasingly complex and reliant on foreign money, foreign policies and global stability.
But navigating the world economy is hardly a priority when you're trying to juggle household finances in the midst of a recession that's left some scrambling to liquidate 401ks and milk credit lines. While consumer credit lines are shrinking and credit card rates are rising, unemployed workers who are in a crunch can't worry about how they might be living above their means with zero income and thereby feeding into an asset bubble. Likewise, homebuyers in 2006 may have hardly worried about how they were feeding into the big housing bust that occurred a mere two years later.
Just as opportunities awaited those once lucky homebuyers in 2006, a way out of crisis awaits the cash-strapped and the unemployed now. Whether it's a reverse mortgage for a senior or a layaway plan for a holiday shopper, consumers who are consuming at even moderate levels are wise to consider their long-term positions. Layaway plans, for example, first came into fashion during — you guessed it — The Great Depression. In an effort to make everyone feel as though there's little need to readjust and curtail spending, these plans may only prolong the problem.
But according to a PriceGrabber.com survey released on October 19, 2009, consumers are more inclined to go the way of the Next Great Bubble and keep the rose-colored glasses in a drawer. As everyone well knows, anything is possible, including a long protracted recovery back to economic health. A whopping 70% of consumers will use the internet this year to do price checks and comparisons compared to 38% last year. And shopping trends project fewer purchases for co-workers and acquaintances. Meanwhile, friends and family members at the end of the receiving line are likely to get cheaper gifts as 53% of consumers are expected to spend less. Whether there's another bubble getting ready to burst or not, there won't be much of a stampede at the shopping malls. NewsSip
Illustration Credit: Christmas Holidays at Merryvale by Alice Hale Burnett. Book Illustrator Charles F. Lester
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