6 More Bubbles Waiting To Burst

I hope gold isn't one of them, bought into it a few months ago so not sitting on a loss but thought that once inflation in UK and US took off it would go higher

If you are showing a profit from the 'gold rush', take it. Gold must be the most vulnerable bubble around.

hey gar111 all those high street shops are offering to BUY your gold not SELL it to you. I conceed gold is in a bull market but we are nowhere near bubble territory yet. From its lows is about four times up over 7 years, if we see a double from here that is the start of a bubble. The two day correction we are seeing is just that a correction nothing more. I'd need more than a two day correction to call the top.

Buying and selling of Art and Wine is definitely a bubble area not mentioned.

DiceMagic, if something goes up 4 times in 7 years that is definitely an indicator of a bubble or a mis-match in pricing (eg. value of dollar falling in the same period). Over that period I might normally expect something to double.

Yorkstyke,

You are quite right that the prudent have suffered and the feckless prospered as a consequence of the boom and bust that this government had eliminated.

However, I can't agree with you about the prudent having the last laugh. With the huge amount of money printed that is now called "quantitative easing" we will be suffering gross inflation in the near future. This will mean that the savings of the prudent will depreciate at a much faster rate than the interest that will be earned.

The only way this government will be able to pay off the astronomical debts that it has incurred will be it encourage the sort of inflation we saw in the mid seventies. It has set its mind against the drastic cuts in public expenditure that circumstances demand, increasing taxation substantially will only depress any growth in the economy that might otherwise occur, inflation is the only other way out.

Yorkstyle

The ads that you are complaining about are what the Fool get their income from. It allows them to offer a free service from which even the financially challenged can benefit - unlike the world of conventional financial advice.

Their articles over the years have been consistently moderate - their message on the stock market (for instance) has been " You can't predict it so don't try - drip-feed your money in". They have whole discussion boards about getting out of debt and not getting into it in the first place.

We come here for useful financial information and advice. If you were looking for it in the ads rather than the content then I sympathise, but you can hardly expect them to put big notices up all over the place saying 'Don't read the ads!"

Skegbyhouse

Hyman Minsky and the Economic Crisis.

Introduction.

The objective of this report is to offer an overview of Minsky’s work in relation to the economic crisis. With this in mind the report is structured as follows. Firstly, an overview of Minsky’s relevant work. Secondly, application of his theory to the crisis. Thirdly, conclusion, outlining potential policy implications.

Minsky’s theory.

Hyman Minsky was an Post-Keynesian economist who applied Keynesian principles to Financial Markets (Pollin 1997, Whalen 2008). Minsky’s work included central banking policy (Minsky 1957), assets portfolios (Minsky 1969), long waves (Minsky 1964), and money manager capitalism (Minsky & Whalen 1996). His most important work is the Wall Street Paradigm, which is divided into Financial Instability Hypothesis, and Financial Fragility. (Dymski 1997, Pollin 1997)

The Minskian context for our current system is Money Manager Capitalism. The main feature of this system is a large number of firms engaged in managing money. Money is a raw resource, used to create profits (like a carpenter with wood). This is a systemic change from previous stages of capitalism, where money was used to invest in projects or trade, which would produce profits. (Minsky & Whalen 1996, Dymski 1997)
Wall Street Paradigm.

The Wall Street Paradigm is divided into its Micro and Macro economic parts, which interrelate (Financial Fragility and Financial Instability Hypothesis).

“The [Wall Street Paradigm] is addressed to this economy rather that an abstract economy. Our economy is taken to be a capital using capitalist economy with complex, sophisticated, and ever-evolving financial institutions and users. The model focuses on the relations between finance, assets, values and investment. It can be characterized as a Wall Street view of the world: The principal players are profit seeking bankers and businessmen.” (Pollin 1997 pp 76)

Financial Fragility.

Financial Fragility is the amount of exposure a firms financial situation has to changes in the markets. There are three types of firms, Hedge, Speculative and Ponzi. (Rima 2002, Pollin 1997, Minsky & Whalen 1996, Taylor & O’Connell 1985Dymski 1997, Anonymous 2007, Anonymous 2009a).

Hedge units have robust finance; they can meet all cash commitments into the future. Speculative units will in the future have commitments greater than internally generated cash. They must borrow in the short term to cover costs. Ponzi units have financial positions maintained through debt, with the hope of capital gains in the future. The mix of these will determine the overall stability of an economy. (Minsky 1959, Pollin 1997, Minsky 1969, Rima 2002, Anonymous 2007)

Financial Instability Hypothesis.

The key aspects of Financial Instability Hypothesis are: capitalism is fundamentally unstable, an “inescapability of disequilibrium” (Dymski 1997 p 506) with unemployment the norm (Pollin 1997, Dymski 1997). Financial stability creates the conditions for future financial instability. By raising expectations and reducing perceived risk (Anonymous 2009a, Dymski 1997, Rima 2002). Rising expectations put pressure on firms to seek profits from debt funded activities, which moves units from hedge to speculative (even ponzi). (Pollin 1997, Minsky 1957)

The economy is dynamic (Minsky 1959), meaning the financial system will innovate either via legislation (changing the rules) or evolution. Changing the rules will open up evolutionary opportunities (shocks). (Minsky & Whalen 1996) Shocks commonly originate from the dynamic system. Crisis starts when a shock causes confidence to disappear.

Investments are uncertain in this dynamic environment and not all information is known, and objective and subjective valuations are mixed. (Pollin 1997) Debt defilation is common, as debt levels rise, the price borrowers pay decreases. (Pollin 1997, Minsky 1964)

Minsky is about more than speculative mania’s in financial systems. To Minsky government intervention is inevitable. He believes government policy affects our “complex, sophiscated and ever-evolving” system by creating regulation, and being a lender of last resort. (Anonymous 2009a, Pollin 1997)

Economic Crisis and Minsky.

This paper will hold the view that the economic crisis was caused by over exposure to debts from consumer spending, and shocks from a burst housing bubble. The trade in overvalued derivatives and the ease of international liquidity, transmitted the shockwaves across the globe. (Magnus 2007, Anonymous 2008, Minsky 1959, Minsky 1957, Anonymous 2007, Peston 2008)

The collapse of Lehman Brothers in September 2008 was the moment confidence in the system collapsed. The crisis became a global phenomenon, causing stock markets to tumble and money markets to dry up. Indeed market champion HBOS, shares fell from 359.72p to 70.1p (02/06/2008 -14/01/2009) (Lloydsbankinggroup.com/investor).

This crisis is one in a long line of crisis, arising from capitalism’s instability.
1980 – Silver Market.
1982 – Mexican default crisis.
1987 - Black Monday.
1990’s – Japans lost decade.
1997 - Asian crisis.
1998 - Russian crisis.
1999-2002 Argentina crisis.
1999-2001 – Dot com bubble.
2007-2009 – “Credit Crunch”. (Pollin 1997, Wikipedia 27/11/09)

Stability causes instability. The benign environment of the last 10 years created the destabilising perception of low risk, indeed the growth that made the situation appear benign was fuelled by cheap debt consumption. (Anonymous 2008)

Rising house prices (expectations), put pressure on consumers to cash in on the boom in house prices (by borrowing more), believing prices could only go up. Pressure built on firms to take advantage of cheap loans to fund growth.

A focal factor in the economic crisis was massive trade of derivatives and other securitisation products that spread risk across the globe. These were dynamic products that grew up from the need spread risk from high lending, moving risk off the portfolio, allowing increased lending. (Minsky 1957)

This spread the risk amongst the system, the system became financially fragile. The asset value of derivatives was absurd, over $600 trillion (Anonymous 2008). Although banks controlled huge amount of assets, outlined above , it is very hard to justify these being tangible assets. (Forbes.com, Anonymous 2008, Minsky 1957)

Many banks within the economy were financially fragile, because of bad debt exposure. The below table demonstrates just how many of the banks were unstable.





Country Banks requiring government assistance
UK Northern Rock, Bradford & Bingley, RBS, HBOS, Llyods TSB
US Fannie Mai, Freddie Mac, AIG, Bear Sterns
Denmark Roskilde Bank
Germany BayernLB, Commerzbank
Netherlands Fortis
France Dexia, BNP Paribas, Credit Agricole, Societe Generale
Iceland Landsbank, Kaupthing
Ireland Anglo-Ireland Bank
Kazakhstan BTA Bank
Dubai Noor Islamic Bank
(created using Forbes.com, bbc.co.uk, france24.com, dw-world.de, cipfinancial.net, wikipedia.org)

Government intervention into the economy averted a global depression. This timely action kept the money markets open and speculative firms in business, staving off a debt deflation cycle and depression. (Magnus 2008)

Evidence presented in this report lends strong support to the theory of Minsky.

Policy implications.

Minsky and the economic crisis have created an opportunity to approach debt and growth, regulation and intervention differently by the government. Some policy implications from this new approach are:

• Growth needs to be at a sustainable pace, growth fuelled by personal and institutional debt needs to be eliminated.
• Personal limits to debt, and minimum deposits for mortgages are sensible steps. (Anonymous 2009b)
• Robust regulation is needed for the current system of “highly leveraged, lightly regulated” (Anonymous 2008) Anglo-Saxon capitalism. This will have to be balanced with the need to keep ‘the city’ globally competitive. (Pollin 1997, Anonymous 2008)
• Creating an intervention fund, with the scale to invest when the economy is in trouble. (Heaney 2009)
• Greater economic intelligence gathering capabilities, to identify shocks.
• Legislation to promote active shareholder ownership.
• A cultural shift to a long term perspectives on profit, and less faith in economic models. (Heaney 2009, Rima 2002)
• Revitalization for cautious banks, which are “small enough to fail”.

Minsky wanted to create an economics that made a more humane capitalism possible, this should be our aim. (Pollin 1997, Dymski)






















Bibliography.

Articles.

Anonymous (2009a), Finance and Economics: Minsky’s moment: Buttonwood, The Economist, London, Volume 391, Issue 8625, April 4th 2009. pp. 77.

Anonymous (2009b) Finance and Economics: An economic bestiary; Economics focus, The Economist, London, Volume 390, Issue 8624, March 28th 2009.

Anonymous (2007), Finance and Economics: Ponzificating; Buttonwood, The Economist, London, Volume 382 Issue 8520 March 17th 2007. pp. 100.

Anonymous (2008), Taming the beast, The Economist, London, Volume 389 Issue 8601 October 11th 2008.

Thomad G Donlan (2009), One Cheer for Hyman Minsky, Barron’s, September 21st 2009. p 51.

Gary A. Dymski (1997), Deciphering Minsky’s Wall Street paradigm, Journal of Economic Issues, Volume 31 Number 2 June 1997. pp. 501-508.

Vince Heaney (2009), Time to ditch all economic models, Financial Times, London, August 23rd 2009.

George Magnus (2008), Is there time to avert a Minsky Meltdown? Financial Times, London, October 13th 2008.

George Magnus, What this Minsky moment means, The Financial Times, London, August 22nd 2007. pp 1.

Hyman P. Minsky (1957), Central Banking and Money Market Changes, The Quarterly Journal of Economics, Volume 71 Number 2 May 1957. pp. 171-187.

Hyman P. Minsky (1959), Indicators of the Developmental Status of an Economy, Economic Development and Cultural Change, Volume 7 Number 2 January 1959. pp. 151-172.

Hyman P. Minsky (1964), Longer Waves in Financial Relations: Financial Factors in the more servere depressions, The American Economic Review, Volume 54 Number 3 May 1964. pp. 324-335.

Hyman P. Minsky (1969), Private Sector Asset Management and the Effectiveness of Monetary Policy: Theory and Practice, Journal of Finance, Volume 24 Number 2 May 1969. pp 222-237.

Hyman P. Minsky and Charles J. Whalen (1996), Economic Insecurity and the institutional prerequisites for successful capitalism, Journal of Post Keynesian Economics, Volume 19 Number 2 Winter 1996-1997. pp. 155-168.

Wolfgang Munchu (2009), Countdown to the next crisis is already under way, Financial Times, London, October 18th 2009.

Robert Peston (2008), The New Capitalism, http://www.bbc.co.uk/blogs/thereporters/robertpeston - accessed 28/11/2009

Robert Pollin (1997), Economic Innovators: The Relevance of Hyman Minsky, Challenge, Volume 40 Number 2 March/April 1997. pp. 75-94


Ingrid H Rima (2006), Venture Capitalist Financing: Contemporary Foundations for Minsky’s “Wall Street” Perspective, Journal of Economic Issues, Volume 36 Number 2 June 2006. pp. 407-414.

Lance Taylor and Stephen A. O’Connell (1985), A Minsky Crisis, The Quarterly Journal of Economics, Volume 100, Supplement 1985. pp.871-885.

Charles J Whalen (2008), A Minsky Moment: Reflections on Hyman P. Minsky (1919-1996), Journal of Economic Issues, Volume 42 Number 1st March 2008. pp. 249-253.

Websites.


www.forbes.com, accessed 25/11/2009

www.bbc.co.uk, accessed 26/11/2009

www.france24.com, accessed 25/11/2009

www.dw-word.de, accessed 25/11/2009

www.cipfinancial.net, accessed 25/11/2009

www.wikipedia.org, accessed 25/11/2009

www.lloydsbankinggroup.com accessed 27/11/2009

gar111 said:

"... i always work on the principle as soon as the general public begin to get into something, then its time to get out."

Spot on. In fact, even by the time banks start recommending - or even just approving - any particular form of investment, it's probably too late to get aboard.

One of the bubbles you have missed is the benefits system - unsustainable.
Re the banks the trouble with them is that they can create credit. If you go in and ask to borrow say £5K they will give you a cheque book and write that debit onto your a/c and start charging you interest on it. They would be daft not to. But they stopped bothering about whether you were able to pay it back. They create credit as a multiple of their assets. So if I deposit £1K they can lend out £1k*N. The toxic loans they have bought from USA appear on their a/cs as an asset so they can lend out Ntimes that. BUT the toxics were a liability so they were digging themselves into a hole. How to get away with it? Well don't bother with any nasty bad debt provisions. It all turned to tears when it came out they had bought junk.
But don't blame the wreckless borrowers for everything. The banks were pushing money across the counter and boosting their paper profits and bonuses. I don't know about creating credit - they have destroyed wealth or to put it another way - redistibuted wealth. I think it is right that inflation is the way out and those who are in cash now will have to watch out next year that they get on the escalator when it starts to go up. Happy New Year.

The one thing that worries me about the US$ is the size of the US fiscal deficit; oh, and maybe the amount of that currency held by the Chinese.

litody, you don't have to sell everything else when you buy gold. Owning coal and gold at the same time is allowed. Gold does have a use, which is why central banks have become net buyers. As people realise that credit is not quite the same as money and that gold is the most acceptable form of money in uncertain times, everything will deflate in terms of gold. Relative to gold, everything is in a bubble.

Ignoring experts because of a novice who sold at the worst moment makes no sense. Jim Sinclair is an expert who sold at the best possible moment in the last 30 years. Does this fact mean that all novices should be ignored?

Whatever you do, I think Sinclair's thoughts are worth knowing.
http://gold.approximity.com/gold_price_models_sinclair.html

I see the Carry-Trade is mentioned, but surely debt more generally ought to be on the list..?

As for 'shares' my ability to predict the market is legendary (more specifically legendarily awful), but I would point out that the FTSE100 is considerably lower than it was 2 years ago. It may well fall from here, but I'm not sure that one could describe the performance over anything other than the last few months as a 'bubble' and I think it would be more accurate simply to describe recent performance as a very strong rally. If one starts calling every decent run a 'bubble' then the term loses any utility it might otherwise possess surely?

Just my thoughts, for what they are worth...

Regards

TC

Gold isn't in a bubble. You can't print gold like you can with paper money.

The dollar as haven?

You write:

It has been very weak in recent times as investors around the world have embraced risk. If there is a flight back to safety, it's the good old US dollar where the masses will flock.

In fact, Sterling and US dollar based assets are likely to suffer due to the risk of further quantitative easing, the indebted state of public finances and the poor economic outlook. A long period of low UK interest rates and continued money printing from the Bank of England is unlikely to help the pound.

It's a game of currencies and the Euro has done well out of the flight to safety, preferred to the dollar.

ABMorley, why do you think people ascribe value to paper bank notes? They have no practical use (like gold, for the most part) and they generate no return unless you lend them to someone (like gold, except that bank deposits are guaranteed). Fair enough, you can burn them to keep warm if you have enough.

Paper money is ascribed a value because the government doesn't let you refuse them in payment of debt, and currency has a value because the government demands payment of taxes in that currency. So we cannot do without either if we value our freedom.

Gold is ascribed a value because it has long been the ultimate form of money, which is why the central banks want it. When people begin to question a government's ability to dictate that the paper it issues is worth more than paper, they turn to hard assets and gold.

Iniq

Semantics is hardly the point of this discussion thread which would be better used discussing the content of the article and relevant financial themes.

In any event, since you seem so adamant about it, I shold highlight that by 1663 the usage of "decimate" had already expanded to mean “to destroy or remove a large proportion of,” according to citations collected in the Oxford English Dictionary. So for nearly three and a half centuries the word has been used in this extended sense - it hardly seems just to pick a fight with a Fool writer over this...

can one bet on inflation going up

BIACS, there was no clogging until people started to comment on it.

is it possible for quantitative easing to be anything other than inflationary in the medium term? if there is more of something it is worth less. This will happen with paper currencies. We should go back to gold coins, it was very convenient and no-one could steal their value.

Caught your fish yet then Bruce from the comments?

hi Fingered do you know if one can place a bet on inflation happening - I am exposed to gold but only because I am convinced inflation will happen because of extra money floating around. But I may have made a logical leap from inflation happening to gold price rising which may not be a tight a correlation as I had first thought.....

I have to agree that Gold (the lumpy yellow stuff) looks like a pretty good buy right now. I wouldn't go near the mining stocks with the size of the PE ratios right now. But I can see $2,000 an ounce easily inside the next 12m. Why? Well, maybe I am a doom merchant but it looks pretty clear to me that global inflation is about to take off in a Big way. Its great for the worlds debt problems to try and inflate the way out of them and I cant see anyone being bothered about getting together in a world action preventing it. Gold is the natural hedge for the inflation prospect and I see it an unavoidable.

I have to disagree that the dollar looks safe as well. I think that the world has had enough of dollars right now and will continue to look askance at the inevitable trough of new issuance that the US cant stop. It has so many programs, is so stymied by congress that they will be trying to raise capital well after its remains sensible to do so. I genuinely believe that will start the global unwind of dollar carry trades. Dont know what'll happen then other than the obvious global inflation, but i know we'll all have a front row seat.