"But the glory has been the glory of pasteboard, and the wealth has been the wealth of tinsel." - Anthony Trollope
The world seems to be taking a form of financial steroids...and maybe taking too much of it.
Yes, dear reader, love for old-fashioned values seems to have given way to price boffing...and the romance of real business ventures has been supplanted by the wham-bam-thank-you-ma'am of money-shuffling hustlers...
...Oh, dear, dear old reader...sigh...
But we pause this morning...to bring new dear readers into the conversation.
The Daily Reckoning began in the summer of 1999. We were convinced then that the tech bubble - centred in the US NASDAQ market - was about to blow up.
Naturally, many readers were annoyed with us. They insisted that breakthroughs in communications technology were making us all smarter - for now we all had access to the worldwide web, and with it came an almost unlimited supply of INFORMATION.
Here at The Daily Reckoning we argued that more information was not necessarily a good thing. Like manure, information can be helpful. But pile too much of it up in one place, and it begins to stink.
"You just don't get it," they replied. To which we let the market respond. Six months later those who "got it" got it good and hard. The tech bubble collapsed, taking many earnest investors with it.
"You don't get what you expect from the investment markets," we remarked, with a superior air. "You get what you deserve."
The stock market was then going down...and the economy was going down too. But it was not much later that a tiny group of fanatics scored what must be history's most successful surprise attack: they brought down two of Manhattan's greatest buildings and twisted America's entire foreign policy - which had there-to-fore been clumsy, but not absurd - towards a preposterous 'War Against Terrorism.'
Under pressure from the delusionary threat of terrorists under every Arab head wrap, and a recession that looked as though it could go the way of Japan's then 12-year slump, the Feds responded with the biggest stimulus of cash and credit in history. Tax rates were cut. Spending was increased. The Fed's key lending rate went down to less than half the rate of inflation and stayed there for two years.
Now, it is time for others to have the last laugh. We didn't think it would work. Americans were already too far in debt, we said. You can't solve that problem by lending them more money at better rates.
Professors of moral philosophy surely approved of our logic. We hope they didn't bet money on it. Lower lending rates set off a new bubble - this one in residential real estate. Suddenly, houses were rising in price at the fastest rate ever. Homeowners were feeling rich and sassy. They wanted to borrow...and now they had something to borrow against. So, it was off to the races, with the biggest run-up in the housing market in 100 years (and the biggest increase in consumer debt ever).
Meanwhile, the Bush Administration drew Tony Blair into its confidence and the two decided to attack Iraq. French president Jacques Chirac tried to warn them off their project; it was too risky, he said. We agreed with Chirac...and wrote a book, with Addison Wiggin, to describe what we saw as America's imperial over-reaching, entitled "Empire of Debt." In Paris at the time, US readers responded by saying they hoped American bombers dropped a bomb or two on us, and Chirac too, on their way to blow up targets in Iraq.
The US housing bubble began to lose air in 2006. Mortgage companies had lent billions to homebuyers who couldn't pay them back. Suddenly, the lenders were in trouble...and the US housing market was, too.
Again, our logic was unassailable: The US economy...and by extension the world economy...depends on American consumer spending. Americans depend on rising house prices to give them the money to spend (there has been no real increase in average wages in the United States in 30 years). Therefore, stagnation or, god forbid, a slump in housing would cause a recession.
Not so far. But a housing market correction takes time. Sellers are reluctant to cut prices; while buyers take each small cut as an opportunity. They are all convinced that the correction will be slight, and quickly put behind us. But in the first quarter of this year, US GDP growth slid to just 0.6%, annualised. That is well below the rate of population growth in the United States, meaning that if the country continues to prosper at that rate, Americans will eventually be as rich as Bengalis or Zimbabweans.
But today comes news that the National Association of Realtors has pushed their recovery forecasts back a bit, on unemployment rates, inflationary fears, and rising mortgage rates. Looks like their certainty in a 'soft landing' for housing is being shaken.
It is a cold and windy day here in London. But all over the world, the financial markets are hot and bubbly. No one seems to care about the weakness of the US consumer. Asset prices are soaring almost everywhere; buyouts at record prices are in the news. Private equity firms are on the prowl and public companies on the run, spinning-off their assets as fast as they can to avoid being gobbled up. Fund managers are getting record bonuses. Living 'artists' are getting paydays that Monet and Rembrandt couldn't have imagined. (More below...)
The rich are getting richer. And the poor? As Warren Buffett said when we interviewed him for the documentary, "A rising tide is lifting all boats...but it's lifting yachts faster."
It's a worldwide Super Bubble - enjoy it while it lasts. Restaurants and bars in central London are full to overflowing - and now the city is the capital of the biggest, most successful industry of our time - modern finance.
People all over the world have come to believe something extraordinary...something that can't be true; that they can all get rich without actually working or saving. Instead they buy and sell financial assets.
Whom do they buy them from and sell them to, you ask? Why each other, of course! Then won't they end up, on average, no richer than they began - or will they end up actually poorer, when you take out all the fees paid to financial middlemen?
Yes, of course. But the longer this amazing Super Bubble goes on, the more people come to think it is normal...the more investment positions depend on it...and the more people suffer when it ends.
Next week...we explain the current worldwide Super Bubble in greater detail.
Bill Bonner,
The Daily Reckoning Australia
Is the Super Bubble about to burst? Leave a comment below.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Jason on 8 June 2007:
Excellent Commentary. I really enjoy reading your articles.
I've been investing for a few years and had been burned by the 2000 crash (the first year I started to invest, Ouch)
The thing that gets me is that I originally started investing to get enough cash to purchase a house, and even though my folio is doing nicely in this market, I am no closer to my goal. This is because housing prices have risen even faster than gains Im making.
The whole thing to me seems like a circus, or some sort of elaborate dupe.
Comment by Tim on 8 June 2007:
Catastrophic
In Oz we are seeing the beginnings of a housing rout. We have inner city units that have not sold in 6 months and entire buildings that seem like tombs due to their low occupancy rates. The vib is that something more nasty than a recession is around the corner. This may not make sense but it feels like a creeping stillness.
Comment by kage on 9 June 2007:
Tell me more about the Oz housing rout - the Sydney story is slowly leaking out, but the full facts won't be known until after the election (complete with sniping on interest rates).
More on the SuperBubble next week ? - that might be too late.
Comment by TC on 12 June 2007:
Oz housing rout ?. Not in Melbourne at the moment, clearance rates are around 87% for auctions here, and have been for around the past 6 months.
We are going through a major inner-city property bubble at the moment.
As for tombblike buildings, try and find a rental within 10kms of the Melbourne CBD.....
Comment by Bill Gardner. on 13 June 2007:
''Money Go Around''
Around[2000-01] after the Aussie Fed Gov release first home buyer's grants,.like sheep many piles in on this,.y not?
The slick spin Dr's in real-estate,..and the current crop young home mortgage lender's and also the State Gov's just love this idea of Tax payer's funds to the prop up the home market,..yes the higher prices rise,.more sales,..the more stump duty n Taxes etc makes our current system run larger than ever,..the more over paid Gov non-export sector.
For those whom held Saving Acc's were whiped by fees low %etc,..for those with huge mortgages were give VIP service.
Brings a smile when i hear Joe average bemoans how local gov's,.[over paid] council jacks up charges for less serivces even while home prices fall.
Would'nt the Fed Gov been better invested the First home buyer's grant into more R&D for our local manufacturing for the future of long term projects?Our Nations old out date infrastructure is a joke as we slowly join with the Asian trade block.
Each year more factories relocated forever into China or other Asian Nations where their Govrnment's welcomes them with open arms.
Downunder the clean n green trendies movement since 1990's
soon became the majority in cities as they had choosen this path.
Yes they bemoan when more jobs going off shore,.and there's a growing dis-like to immigrants,..fact is the greater the population the greater the prices of homes and this current suppercycle growth in personal asset prices to reach these lofty levels.
No more Dams!!!,.[1982],..look now at the current water shortage,.the list goes on.
The mob rule had gotten their desires havn't they now.
Best wishes.
Bill.
Comment by Brian on 10 June 2008:
After the run Australia has had on its Real Estate ,the smart money is getting out now , it takes a fair while before the avarage joe catches up with every thing and it aint to late yet, although you better hurry . Get cashed up and get ready to make some fast bucks.. Regards Brian
Comment by karl on 11 June 2008:
I couldn't believe people were still buying property anywhere in Australia at these prices, until a mate of mine informed me of the laughable "negative gearing" rout and why wouldn't you buy investment properties when you can claim the disparity between rent and mortgage as a tax write off!!?.
Nevertheless, how quickly people forget that the same block of land 5 years ago with the same house (in rare cases including a new coat of paint) was less than half of what the asking price is now. When the same item with little to no improvements costs more money.. isn't that called inflation?
The money goes round and round as Bill Gardner points out, until it stops on the greatest fool who's left paying back the upside down mortgage and we have an identical problem as the US, except ours will be much worse.
Perhaps we are experiencing the stage of inflation where it makes more sense to buy anything at any cost rather than be caught with useless savings? I know my (once considered substantial) savings have taken an absolute battering at the hands of inflation, but I'm no greatest fool.
How long can it continue without something giving? Maybe currency itself?
Comment by Pete on 11 June 2008:
Ah Karl... you know what the DR would say... buy gold!
Or buy some tasty petroleum stocks and have your finger ready on the sell button at the sniff of popped bubbles (you may need to empty the pantry of all Rice Bubbles just in case).
Comment by Pete on 11 June 2008:
Unrelated - whats with the lack of DR articles lately? 6th of June was Friday!
Comment by Pete on 11 June 2008:
Sorry, I stand corrected, this article is 8th June... strange that I cannot see any articles from the main page that are later than the 6th...i've even tried forced refresh (CTRL+F5).
Is it just me?
Comment by GaryB on 12 June 2008:
Looks like the DR team have gone on strike, Pete. Same here, can't see anything on the main page later than 6 June.
Comment by Pete on 12 June 2008:
Looks like it GaryB! Its the same for me at work too.
Also, I stand doubly corrected (by me), this article is 8th June from 2007...duh!
Comment by Freak'd on 12 June 2008:
Yeah Pete and GaryB. Not much from the DR - all the while most world stock markets seem to be making another lurch toward Antarctica. I thought they'd be gloating big time lately (and rightly so).
Comment by kathy on 13 June 2008:
if optus is blocking their website perhaps somthing is going on with the service? who knows but they are conspicuous by their absence in times when their commentary would be great to hear.com'n on where is the voice crying out in the wilderness???
Comment by John on 13 June 2008:
Just spoke to Optus and they claim that they are not blocking the website or daily e-mails, so the problem resides with DD &/or their ISP. MoneyMorning has the same set of problems. Did somebody not pay their accounts?
Comment by Coffee Addict on 13 June 2008:
The DR email says it will be business as usual on Monday.
Many of readers of this and other contrarian information sources are in their financial life boats and will take a low profile until the storm abates. Top marks to the DR crew for maintaining a quality forum in difficult times.
As for the week just ended....... it is NOT be in the interests of the 4 Australian major banks to allow B&B to go down. Foreclosure is much less likely than a buy out, particularly given the good earnings that B&B have posted to date.
There are a few alarmist peak oil views being promoted on other DR sites this week (probably based on of Matthew Simmons' analysis). I don't agree with the view that Saudi oil is about to run out and note that this aspect of Simmons' analysis appears to fail technical scrutiny. Other aspects of Simmons' peak oil work maybe more insightful but you would need to be a hydrocarbon extraction engineer to reach a meaningful conclusions. In any case I would have to agree that coal is gold and will remain so.
Comment by christina on 13 June 2008:
We miss you Mr Editor- come back
Comment by christina on 13 June 2008:
Ps- Dear other readers, I notice that the daily reckoning in America is still getting new articles. If you are addicted like me, then until out dear old Editor comes back to us kiddies, I just discovered that at http://www.dailyreckoning.com (instead of our .com.au) , you can read the American version there