3 Bubbles That Will Shape 2009

It’s as reliable as the sun rising in the east: Financial bubbles burst. All of them do. Always. Usually in grand fashion. Over the years, there have been dozens and dozens of them, and every single one has ended badly. Shall we reminisce? Here are a few big ones:

  • Tulip mania
  • The South Sea bubble
  • The railroad bubble
  • The Roaring '20s
  • The 1980s buyout bubble
  • The dot-com bubble
  • The housing bubble
  • The American Idol bubble (Fun fact: More people vote for American Idol than typically vote for the winning President)

There are probably more, but you get the idea: As long as there has been an economy, there have been bubbles.

So what bubbles might underline 2009? Here are three distinct ones I can think of.

Bubble No. 1: Treasuries
As I write this, a three-month Treasury bill yields 0.005%, a 10-year note will fetch you 2.5%, and a 30-year bond will score you a spectacular 3.007%. For comparison's sake, inflation has averaged 3.42% since 1913.

If the expectation is that every other asset class will be eroded by deflation, skimpy returns on government bonds might not be a bad idea. I bet most investors would have loved to achieve "only" a 0.005% return over the past year, compared to the destruction of nearly every other asset class.

Still, the stampede into Treasuries will eventually burst. It has to. One of two factors practically guarantees this:

  • Things will get better; investors will regain an appetite for risk, and move away from Treasuries.
  • Things will get worse, prompting more bailouts and more stimulus packages, eroding faith in the dollar.

Either way, the Treasury bubble won't be fun when it bursts. Having sent the government's borrowing costs higher, Uncle Sam might have a tough time funding its trillion-dollar endeavors, and this could leave companies like Citigroup (NYSE: C  ) , General Motors (NYSE: GM  ) and Ford (NYSE: F  ) up in the air should they come back, hats in hand, asking for more ... which, come to think of it, probably isn't a bad thing.

Bubble No. 2: Fear
Have a look at these fear indicators:                                                       

  • In January of 2007, the spread between corporate junk bonds and U.S. Treasuries was just 2.65%. Yesterday, it was more than 20%.
  • Annaly Capital (NYSE: NLY  ) -- which invests solely in Fannie Mae and Freddie Mac securities -- saw the spread on its investments surge from 0.67% to more than 2% over the past year, even though those investments technically became less risky after the government nationalized and guaranteed Fred and Fan.
  • Credit default swaps on Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) surged to 440 basis points last month (higher than Citigroup's at the time), meaning some assumed a Berkshire bankruptcy was a very real possibility within the next five years.

What started years ago as a bubble of optimism has morphed into a bubble of fear today. Sure, reckless speculation needs to be purged out of the system, but an economy that's unwilling to take any risk is just as bad as one that's oblivious to it.

One worry is that even financially healthy consumers will become gripped by fear, slamming their wallets shut and exacerbating an already beleaguered economy. Another is that investors' hesitation to take any risk could stifle the venture capital investments that produce the Googles (Nasdaq: GOOG  ) of the world, hurting our chances of staying globally competitive when we need it the most.

Let's not forget that when Franklin D. Roosevelt warned, "The only thing we have to fear is fear itself," it was in the context of factors he thought could prolong the Great Depression. And he was right.

Bubble No. 3: Distrust
In just the past week, we've been blindsided by two (really, three) big stories that could lead to a bubble of distrust:

  • Illinois Governor Rod "do I hear $500,000" Blagojevich undermining the credibility of politicians.
  • Money manager Bernard Madoff, whose self-described Ponzi scheme may have blown through $50 billion.
  • The Securities and Exchange Commission being asleep at the wheel while Madoff committed perhaps the largest financial fraud in history.

All three are pretty appalling. What's scary is that the few bad apples who make all the headlines ruin it for the honest politicians (I'm sure they exist) and credible money managers that are vital to the economy. The old saying that "capitalism is based on trust" is getting tested, and that's a scary, scary proposition. If these shady headlines keep up at this pace, one fear is that we could become a culture that dismisses even sound financial advice and refuses to accept almost everything politicians do, which certainly isn't a recipe for anything economically healthy.

This could just be a partial list, of course. Any other potential bubbles you can think of? Feel free to share your thoughts in the comment section below.

For related Foolishness:

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Annaly Capital Management is a Motley Fool Income Investor pick. Berkshire Hathaway is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor pick. Google is a Motley Fool Rule Breakers selection. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.


Read/Post Comments (26) | Recommend This Article (81)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 16, 2008, at 4:37 PM, TMFMarlowe wrote:

    Man, I gotta figure out how to short distrust.

  • Report this Comment On December 16, 2008, at 6:17 PM, knighttof3 wrote:

    Marlowe - ditto. Failing that, is there a practical way to short treasuries? I know I could short dollars using currency ETFs but I think Morgan's point is that treasuries will come down in price substantially more than dollar itself would lose value; as US investors move away from treasuries into other assets.

  • Report this Comment On December 16, 2008, at 6:57 PM, FinancialFellow wrote:

    I think we're starting to stretch the definition of what a bubble is... Playing along, I'd like to see the consumer debt bubble burst. Consumers have been racking up too much debt for too long. I hate to say it but a small part of me roots for the recession to turn into a depression just so more people can be scared into saving more of what they earn instead of piling up debt on their credit cards. Speaking of credit cards, here's an pretty good promo that I came across: http://financialfellow.com/2008/12/11/discover-card-offering...

  • Report this Comment On December 16, 2008, at 7:13 PM, sharktrade wrote:

    The biggest one, the drop one

  • Report this Comment On December 16, 2008, at 8:46 PM, hikerdude7088 wrote:

    There will be no bubbles without jobs.

  • Report this Comment On December 16, 2008, at 10:06 PM, falang1 wrote:

    TBT = Treasuries short (or ultrashort). I'm picking up some here and there. I'm also long optimism and good guys.

  • Report this Comment On December 16, 2008, at 10:26 PM, Clint35 wrote:

    Um, why does Annaly Capital only invest in fred and fan mortgages? Doesn't that make them way under-diversified? Isn't that bad? Or am I carzy?

  • Report this Comment On December 17, 2008, at 10:13 AM, GrimeyGoose wrote:

    "undermining the credibility of politicians."????

    Since when where they credible?

  • Report this Comment On December 17, 2008, at 10:33 AM, celticspirit wrote:

    Have to agree with Financial Fellow - the consumer spending bubble has well and truly burst and will have a medium to long term effect. For the last 10 years I have watched people on average incomes live as if they were all earning six figures - new cars, holidays, home improvements, entertainment. Everything seemed to be possible for them. They borrowed on credit cards, on the back of an increase in their property values, based on bonuses (some retailers are really going to miss those financial exec payouts), and on the iea that the only way was up up up. Banks and government fuelled this. A good recession will clear the decks and bring back some sanity to the world. Good businesses will survive and pick up the business of the poor ones. Bonuses will get paid based on real performance not short term recklessness and people who shouldn't get loans won't. And hopefully we will work out what is really important in life and it's not money or material things. My concern is by meddling with the markets and trying to "help" everyone and every business out of a hole we will only prolong the agony.

  • Report this Comment On December 17, 2008, at 12:32 PM, Slipswitch wrote:

    I think the term bubble is being overused. Railroads were not a bubble. For 100 years they drove the economy. Economies evolve. Was the agricultural revolution a bubble? The industrial revolution?

  • Report this Comment On December 18, 2008, at 2:10 AM, Kopanitsa wrote:

    To 'short treasuries', check out the TBT and PST Exchange Traded Funds.

    These funds use interst-rate swap contracts so their value goes up when treasury interest rates go up.

  • Report this Comment On December 19, 2008, at 2:39 AM, Daline wrote:

    The USD bubble

  • Report this Comment On December 19, 2008, at 9:37 PM, Sherlocksfriend wrote:

    Healthcare. We have the lowest health statistics of all the industrialized nations, at twice the per capita cost. We underutilize GP's; they give the best outcomes for the lowest cost and yet we underpay them and utilize specialists instead. As with Madoff's investors, there is an amazing lack of curiosity among our wealthy and successful citizens. They know little about the economics of healthcare, and don't much care so long as they have insurance. Insurance companies, big pharma, and rich surgeons have enough money to seriously corrupt the system. Health outcomes are strongly affected by socioeconomic class, causing distrust and unrest among the poor. A black-friendly administration could more easily lead to a burst in this $2-3T industry, because our black citizens correctly see the whole thing as an outrage that particularly affects them and their families. Finally, with consumers forced to save everywhere they can, and healthcare accounting for 16% of our GDP, this cash cow could suddenly develop mad cow disease!

  • Report this Comment On December 19, 2008, at 11:50 PM, motleychang wrote:

    Watching this it amazes me that so many people still dont get it

  • Report this Comment On December 20, 2008, at 12:50 AM, Luther1517 wrote:

    I agree with motleychang alot of people don't get it.I think that as the Garner brothers said that fresh water in developing countries is a new bubble but will only be bursted by new nanotechnology filtration that drastically increases the fresh water supply. If countries can get a hold of this technology then fresh water will be cheap. As of right now though this may take a few years to impliment.

    If blacklighting technology actually works and does not cause pollution then the solar panel hybrid cars will be a great bubbles with companies such as HK 1211 to get in on right now and ride for a while before people get greedy.

  • Report this Comment On December 20, 2008, at 1:03 AM, gamblegold wrote:

    capitalism primarily depends on one thing only: keep the money moving. unfortunately during my lifetime, the government has come to depend upon encouraging public and private debt as a means to keep that maxim alive.

    even now, with all their harvard degrees, these morons keep piping the same song over and over again as seen in the so-called bailout which is nothing more than buying debt up in an housing 'bubble' in the hopes that the stupid masses will go out and bury themselves in even more debt to 'revive' our economy by paying too much for houses and other real estate (and just about everything else).

    the federal government itself has too long spent too much to gain too little in long-term benefits. state governments, particularly in the last two decades have followed suit. my own state government spends nearly 2/3rds its bi-annual budget on education alone -- never bothering to evaluate where and how that money actually gets spent or if it produces what it's suppose to (giving rise to declining education standards despite the rise in money spent). the rise in this spending has exceeded the rise of inflation in each of the last 12 years by double digit figures.

    apparently, those in all levels of government are incapable of doing simple math -- the rise in what we spend vastly out-paces our ability to raise revenue without doing damage to our national and local economies. what does this mean? it means that the money stops moving -- and we get a credit crisis as a result.

    as long as the government attempts to deal with this 'recession' by moving debt around instead of allowing the economy to absorb it's own excess and creating real value in the long-term, then we will keep dancing ever closer to the big 'D'.

  • Report this Comment On December 20, 2008, at 1:04 AM, DaretothREdux wrote:

    Future bubbles will all be cause by government intervention:

    1. Health Care Bubble

    2. "Clean" Energy Bubble

    3. USD Bubble

    If you can track the money that your government stole from you to give to someone else, then you can find the next bubble. Right now I think Citigroup, AIG, and GM are all in bubbles due to government intervention and the actual price of these companies is much lower if not zero.

  • Report this Comment On December 20, 2008, at 4:58 AM, aaronapro wrote:

    The fear/trust issues are real and worldwide. Quite unfortunately, most of the present worldwide economic problems started in the USA. These issues are a consequence of the enormous corruption that exists in US markets that the SEC refuses to control. For example:

    1) There continues to be widespread naked short selling in many companies (e.g., MSCC/OFIX to name just a couple. Naked short selling is against the law, but the SEC refuses to enforce the law. In addition, the SEC eliminated the uptick rule on shorts that has given naked short sellers free reign over the market.

    2) Rating agencies closed their eyes to the credit quality in the housing market to induce banks all over the world to buy AAA??? rated paper which was actually C paper. Institutions all over the world purchased the paper based on faith and confidence in the US financial system: they will not be fooled again.

    3) The $50 BIllion Madoff scandal-again, complete absence of SEC oversight. Spain's Santander Bank took a $3 Billion hit only because of their faith in the US system. Along with many others, they will not be fooled again.

    A consequence of these examples is that investors all over the world have lost faith in the US financial system. It will seriously harm future capital formation for a very long time. Why would a new company want to launch an IPO in the US and expose itself to the potential of bankruptcy/delisting on the exchange because naked short sellers drive the price down to zero based on rumors created by naked short sellers? Better to form a company and launch an IPO on the Spanish/Indian/Hong Kong stock market that actually enforces the law.

    People read about pirates in Somalia??? USA financial pirates are much much worse and more damaging.

    It will be many years before the USA regains faith and confidence of worldwide investors. The lack of SEC oversight and corruption in the US financial system has made the USA a backwater in the worldwide financial market.

    Aaron Ashcraft

    U.S. citizen retired to Barcelona, Spain

  • Report this Comment On December 20, 2008, at 6:50 AM, secondo wrote:

    My sincere compliments to your sharp analysis, Mr. Ashcraft, I could not agree more with you. I just would have added the ugly word "greed" in the third line of your brillant essay.

    Louis Hafner, Switzerland

  • Report this Comment On December 20, 2008, at 10:21 AM, Sherlocksfriend wrote:

    Healthcare. We have the lowest health statistics of all the industrialized nations, at twice the per capita cost. We underutilize GP's; they give the best outcomes for the lowest cost and yet we underpay them and utilize specialists instead. As with Madoff's investors, there is an amazing lack of curiosity among our wealthy and successful citizens. They know little about the economics of healthcare, and don't much care so long as they have insurance. Insurance companies, big pharma, and rich surgeons have enough money to seriously corrupt the system. Health outcomes are strongly affected by socioeconomic class, causing distrust and unrest among the poor. A black-friendly administration could more easily lead to a burst in this $2-3T industry, because our black citizens correctly see the whole thing as an outrage that particularly affects them and their families. Finally, with consumers forced to save everywhere they can, and healthcare accounting for 16% of our GDP, this cash cow could suddenly develop mad cow disease!

  • Report this Comment On December 20, 2008, at 11:22 AM, consumerrevolt wrote:

    one of the next bubbles will be commercial real estate, over leveraged and grossly over built.

  • Report this Comment On December 21, 2008, at 12:38 PM, specht3 wrote:

    Right on! A very concise and thoughtful analysis. Thank you!

  • Report this Comment On December 21, 2008, at 2:34 PM, secondo wrote:

    A very concise and thoughthful analysis? Which analysis? Are you referring to trevonline's prose?

    I can't believe that - unless you trust someone who allows himself massive shortcomings in the English language. Right on!

  • Report this Comment On December 22, 2008, at 11:16 AM, waropayk wrote:

    Thumbs down to this article. Seems like the Fool is just looking to fill up our inboxes with something. I wish they had a "Not Recommended" Button. I would've pressed it.

  • Report this Comment On December 23, 2008, at 12:14 AM, PlanB101 wrote:

    Bubbles, bubbles. Not very helpful. Where are we supposed when these bubbles burst? Oil? NO. Gold? Not sure. Asia? Probably not. Should I go with my mattress? Coffee can in the freezer? Ahhh.. the suger bowl!!

  • Report this Comment On February 09, 2009, at 4:00 PM, OleDrippy wrote:

    Give me a reason not to be fearful or distrustful. Where are the honest politicians? I know they are out there, but are an underwhelming minority.

    Where are the competent financial advisors? What is the best advice they have given other than "it can't go down forever", or "stay diversified, you'll be fine".. Where are the competent analysts? Through all of this only 5% of stocks were/are rated as "SELL"... HAHAHA!! Worse than weathermen.

Add your comment.

DocumentId: 795808, ~/Articles/ArticleHandler.aspx, 7/30/2014 1:25:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement