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The reason? Too much capital, not enough growth to invest in because demand isn't growing.
Demand isn't growing because 60% of the population is barely scraping by.
How do you increase demand? Roll back the tax cuts to the wealthy who have nowhere to put that money except into speculation and bubbles. Redistribute it back to the working class in the form of tax cuts, credits, higher minimum wage, and social programs. They will immediately put it to work by spending on things they need to get by. Demand increases.
That money trickles back up to the wealthy who receive the profits from that spending, and invest it back into the industries where demand is actually growing.
Voila, more growth, fewer bubbbles.
Among the things that people can't afford and really need, the most common ones are healthcare and housing.
The problem with giving people more money to stimulate demand for those things is that it only solves half of the problem. Healthcare is limited by the supply of doctors so no matter how much government subsidizes it, the amount of people who can be seen by the constant number of doctors will be the same. In practice, this means the price will increase every time you try to give people more money for healthcare.
Housing is similar in that even if you give people money for new houses, everyone wants their house to be in a nice location and there are only so many houses that can fit in a constant amount of desirable real estate.
Without reforms to medical school and medical residency programs, healthcare might never be affordable. Without reforms to zoning laws, housing might never be affordable.
Without at least allowing for an increase to the supply of nice things, increasing the demand of nice things won't be very helpful.
QE3 inflated the things in question, not 'tax cuts to the wealthy'. in fact, taxes have gone up on the richest and that bubble continued to inflate. if you want to make it about politics, (and if this is a bubble of bubbles), it was done under the fed under a liberal president - who claimed credit for its 'success'.
when you put funny money in the market, tech booms, paper assets boom and investment in hard industry becomes less appealing. the investment in tech has failed to rise all boats. its only raising boats for some very select geographies, and perhaps that could have been changed if tech developed differently (less monopolies), but it didnt.
The problem is that conservatives find working-class-specific programs offensive, and liberals construct elaborate social programs where a hefty chunk of cash vanishes into overhead. Just give the money back to the working poor - if the problem is a shortage of money in the economy creating demand, then put the money directly into the economy by the most direct method possible.
> Voila, more growth, fewer bubbbles.
It seems simple on paper. But the wealthy didn't get wealthy by giving away money.
Asking the wealthy to hand back some of their "welfare" is going to be incredible difficult and unsuccessful.
Think about it. It's easier to ask 1 million people to give up $1 each than it is to ask one person to give up $1 million dollars.
> Roll back the tax cuts to the wealthy who have nowhere to put that money except into speculation and bubbles.
This is pretty directly contradicted by the post. The real estate markets that have higher taxes on the wealthy are showing more bubbly behavior.
Higher taxes on high earners may be a good idea but they’re not a solution to bubbles.
I like how you think comrade!
Yes there is too much capital, after all the US printed over a trillion dollars to avoid the collapse of the financial industry. None of those banks except for two went bankrupt, which means that now you have an extra trillion dollars that will eventually funnel through the system.
Well, look we are nearly a decade later from that moment so that money has gone through the system, aggregated usually with the 1% and then dispersed.
Additionally the world continues to become more global. If you look at some of the main residential markets in America like NYC and Miami, you will see that a significant percentage of purchases aren't from US citizens, but instead, international buyers that are moving their money into a more secure asset offshore and away from their government.
In Miami there is a lot of money from Russia and South America. In NYC it is a lot of money from China.
Then consider that after the housing bubble popped it would only be natural that money would look for another asset class to invest in so it shifted to the stock market.
Certainly there is speculation there, that's the nature of the stock market but the largest companies that have the majority of the growth are simply larger due to higher revenues. What made them successful five years ago are macro trends that are still playing out.
As massive as Amazon is it's only a small percentage of overall sales, which still occur at retailers, however the macro trend of more sales happening online hasn't stopped so you are seeing that continuation.
Apple could be argued is under valued, not over valued.
Google is still continuing to grow.
Sure, Tesla could be considered a bubble, but eventually it grows into the valuation or the irrational exuberance stops and the stock will decrease to it's real valuation. Similar to what happened to LinkedIn. But again, that is too small to really matter on the global scale.
The question of reducing taxes to spur more demand, well that won't really work. Think of it this way, if you reduce taxes even 10% that isn't going to lead to more cars being bought. Sure things that you need like groceries and maybe making your rent, but you aren't going to be making massive purchases.
That tax cuts would benefit the rich the most, because 10% of a $10MM salary means an extra $1MM of cash after you already have enough for savings, so that really does become discretionary spending money. But those people would again purchase the most expensive assets and drive up real estate prices.
Also very unlikely that you could push through a tax cut for a single class or even two classes without a tax cut for the rich, otherwise it would be called socialism, which is misunderstood, but still hated and feared in America.
These are just normal shifts of money moving depending on the barriers that it encounters. We all are exposed to inflation so money needs to be shifted as inflation is it's own version of having limited timeline. Leave the cash under a mattress and 50 years later be surprised by how much spending power you lost.
If you look at the American economy manufacturing is only 10% of salaried positions and 80% is the service sector. So you are seeing how this plays out over time.
The reality is that the world was never equal, and unless you want to move to communism where everyone has the same stuff, it will never be equal. As such there will be some winners and some losers.
Now if you really want to reset this imbalance, it isn't about tax cuts for the poor, but instead massive taxes on the rich. That would then move those funds back to the government, they could focus on more infrastructure which is sorely needed, and it would be coming from the very class that can afford to lose that money.
This would decrease some of the real estate prices, but that could lead to problems in building as well, which means that sector will lose jobs.
The reality is that everything is interconnected, you can't change one thing without affecting everything else.
But certainly if you want to tax those that have the most you could move forward.
Plus, check out what the highest tax rate was on the largest income earners 80 years ago and be surprised by how high it was.
Meh to almost everything here except maybe housing.
Corporate debt is high because DEBT IS STILL CHEAP (fed is changing that). Of course they're going to borrow fuckloads of money, it's practically free by some measures!
The indexing "bubble" is actually a correction for a lack of value from active funds. I don't expect the correction to be corrected.
The cryptocurrency bubble is tiny. 65 billion? That's a rounding error.
5 Stocks accounting for most of growth is troublesome when corrected, but still not catastrophic. If we lose ALL of that growth then we go back to 2016 levels? Ok.
Just providing nominal values and comparing them to values decades ago is so basic BS marketing strategy. Any investor who wants to figure out risk levels must put it all into context. Usually it means ratios.
Just few examples of putting things into context:
* Household Debt Service Payments as a Percent of Disposable Personal Income https://fred.stlouisfed.org/series/TDSP
* Household Financial Obligations as a percent of Disposable Personal Income (FODSP) https://fred.stlouisfed.org/series/FODSP
* Household Debt to GDP for United States© (HDTGPDUSQ163N) https://fred.stlouisfed.org/series/HDTGPDUSQ163N
The housing bit interests me but I can't take it seriously when they're pointing at the single most irrationally priced area in the nation to make the overall situation look similar. Yes, if you want to live in SF you can expect to pay utterly idiotic amounts. But that's pretty much isolated to SF.
> 5 Stocks accounting for most of growth is troublesome when corrected, but still not catastrophic.
Yes -- this is the whole point of owning a broad index.
You get exposure to the highest-performing stocks -- what those actual companies are changes over time.
And there's usually another company to step up and fill the gap when one of the leaders falls.
practically free indeed, vs the practically have to pay for keeping my savings on a savings account... shrugs in discontent (tax is higher on my savings then the interest i get, for those that didn't understand)
> Meh to almost everything here except maybe housing.
Care to elaborate more on the housing.
This infographic is about as useful as that "legendary investor" who claims the world is going to end in chaos every year.
What indicators are predicting a "pop" or that this is a "bubble?" What exactly are they predicting will happen?
Just seems like a lot of numbers and infographic fear mongering otherwise.
And a lot of cherry picking of data.
Fun fact: Capitalism depends on crises - they are not the exception, they are the rule. People forget that and treat it as something that happens, like a natural catastrophe. This is unfortunate, because this is a purely man-made thing, but still, even the high end media is kind of left in the dark about this central theme (let alone economists, who sometimes get lost in the details of their specialisation).
Now the real analytic question to ponder is: where exactly does this destructive element of capitalism originates from (left as an exercise for the reader).
Crises aren't necessarily destructive, or something that needs to be prevented. When railroads were first built across the USA there was a huge bubble in railroad stocks. Many investors lost everything, but the country ended up with some great transportation infrastructure.
It's called a business cycle:
Ray Dalio explanation here: http://www.economicprinciples.org
Well I'm glad you cleared all this up for us!
Well, Minsky's financial instability hypothesis is at least interesting. His argument is, basically, that there's a cycle wherein: during normal times, people want to beat the averages, so they engage in more speculative bets; as that ratchets up, and speculative positions become increasingly leveraged, a point comes where debt is financing interest on speculative leverage; once enough people get suspicious, further debt isn't extended, so the speculative positions default and drive cascading defaults (since there's "blood in the water"); the after-crash period comes with a renewed sense of caution, and people accept lower yields as the price of earlier speculative frenzy; over time, the caution comes to seem outmoded and people believe that normal times are here again; and so on.
I'm not sure how I feel about this, but it's at least a perspective.
One issue:
Big business have got drunk on low interest rates and corp. debt so cheap, making it very good for big business but negative for the majority of the worlds population.
So they like to see interest rates to remain very low, and have leverage with governments saying their business it at serious risk if interest rates were to return to 'more sensible levels'. Which is kinda true!
Also:
People with sufficient savings or disposable income have choose one of the few obvious/easy investment options and buy into property, either upgrading or buying more properties.
The wealthy who have access to good financial tools have also invested into property, both commercial and residential. Hence so many empty properties in London, that people complain about.
Driving up the price, so further squeezing the population who are not able to follow.
Hence the rise of Trump and others, promising to make America great again, cuz so many voters are being squeezed.
Low interest rates is like a drug addiction, but the addicts (big business) are not the ones suffering.
Hence the rise of popularism and the likes of Trump into powerful positions, but he is sitting on the side for businesses and not the person. He incorrectly believes recovery can only be found with big business, but I believe this just perpetuates the addiction.
Interest rates need to rise (ouch!) and companies must be forced to pay the taxes they owe. Also giving individuals with big investments (risks) into property to exit gracefully without the property market crashing, which hurts everyone.
Why is more investors indexing a “bubble”? Is it just because of the growth line?
While there surely must be some crappy indexes out there, one could argue that more indexing by (individual) investors is a sign of a more people understanding the difficulty of stock picking and harsh effects of management expenses on investment returns.
I’m very happy indexing in my retirement portfolios, but am curious as to what the arguments against it are. The few I’ve read have seemed to be active fund managers scared at the prospect of losing their livelihood to a better product.
The term "bubble" gets thrown around a lot, sometimes incorrectly. It doesn't just mean that money is flowing into an asset class.
Let's take an S&P 500 index fund as an example. Vanguard or whoever does some marketing, and people decide that index funds are a good way to invest, and money flows into index funds. That's not a bubble.
The economy starts doing well, and stocks go up, and a bunch more people decide that they want to be in the stock market, and so they put their money into an S&P 500 index fund, not because they really want to be in the stock market, but because it's what's going up. That's still not a bubble.
Vanguard gets a bunch of money for its S&P 500 index fund, which it has to use to buy stock in the companies that compose the S&P 500. As a result of all the new money coming in, the stock in the S&P 500 companies go up - more than the fundamentals of their business indicate, more than stock in, say, the Russell 2000 goes up. Because the S&P 500 has gone up more, more money pours in to S&P 500 index funds. Now the S&P 500 is going up because of all the money being invested in it, and all the money is being invested in it because it's going up. That's a bubble - a positive feedback loop that has become detached from the fundamentals of the assets involved.
That's a bubble, but it doesn't really get bad until borrowed money enters the picture. If people are borrowing money to invest in S&P 500 index funds, because the funds are going up faster than the interest cost on the borrowed money, now it's a bubble that can cause serious damage when it pops, because it may damage the lender as well as the borrower.
So, for example, people were talking about bonds being in a bubble because bond prices were so high (extremely high by historical standards). That was a flight to safety, not a bubble. People were not buying bonds because they expected bond prices to keep rising, they were buying bonds because they expected other prices to keep falling.
I have no great difficulty believing we're due for another pop, but the only one of these that I find remotely alarming is the auto loan one. The rest seem to be one of: utterly irrelevant (number of cryptocurrencies in circulation?), lacking any frame of reference, or readily attributable to the economy still not being really recovered from the 2008 crisis.
We have ever-increasing amount of money in the system (banks figure out ways to create money)
But there isn't much real growth in useful, appreciating assets. E.g. most of production capacity these days operates with ever-thinner profit margins.
Therefore money flows in a few vehicles still considered performing. Such as real estate. This creates a lot of bubbles in the absense of real growth.
This is not unlike to when a ship sinks, everybody clutters at the ever-smaller area still over water.
They missed the higher education bubble to include in the list.
This is extremely unconvincing.
Some of the debt statistics fail to account for the cash Corp America is holding on their balance sheets, so that's an incomplete picture.
Also, I posit that a lot of the inflation in indexes relate to redistribution of wealth. When fewer people have more, they are willing to pay more for just about everything: cryptocurrencies, stocks, houses in prime areas, etc. Bubble status would require some proof points suggesting we have reached systematically unserviceable levels of an underlying fundamental.
The great thing about predicting bubble bursts is eventually you’ll be right! (And if you’re wrong, so what)
Whoa - five stocks (Amazon, Facebook, google, Apple and ?) account for most of the gains in SP500 this year?!
Seriously?
Can the figures for "Real Residential Housing Price Index for Canada" be correct? The quoted index values are:
2010: 36.3
2016: 413.9
I simply cannot believe there was an 11-fold price increase on this index over this period.
Googling I cannot match either of these figures to various Canadian real estate indexes reported on the web.
The increase in corporate debt is worth watching because most of that will have to be refinanced and is thus sensitive to rising interest rates. Much of the proceeds were used for questionable purposes like repurchasing stock near historic highs instead of investment in the underlying business. This is a proven way to boost short term stock price and EPS, but not so much the capacity to repay.
That said, it's disingenuous to compare 10yr treasuries to indices comprised of bonds with a maturity of >=1yr. Issuance skews shorter term that 10 so those indices probably do, too.
I prefer the Shiller PE for my doom-and-gloom. ;-)
As bubbles go, this one seems rather localized. Looking at that infographic, one can see than in the real estate and stock market sections most clearly. In the former, most of the gains went to certain select markets, mostly in coastal cities. In the latter, most of the gains went to the usual few suspects such as AMZN, FB, and GOOG.
It might follow that we might see localized bursting rather than a system-wide meltdown if this "bubble" pops.
"The Stock Index bubble"
Okay, does that actually mean anything unless the companies maintaining the index portfolios are at risk of going under?
Is Vanguard about to go bankrupt? (lololol)
"More cryptocurrencies than fiat currencies in circulation."
Yeah. Well, no, that's a completely meaningless point. Even "marketcap" for Bitcoin is useless---a marketcap is the marginal price that the greatest current fool is willing to buy one thingy for, multiplied by the number of thingys.
There may be too much money in cryptocurrencies, but this chart isn't showing that.
This is sort of a mashup of ideas of varying quality. I think that you could make an infographic like this at any time in history.
My favorite is the ad bubble of course. I have a Twitter thread discussing it with BrendanEich: https://twitter.com/BrendanEich/status/912750677331283968
The "worth" of something is an irrelevant metric. What is the actual debt value?
Bitcoin 'market cap' is almost meaningless to compared to the market cap of a stock. It's a misleading term in this usage.
Maybe the Austrian economists warning about easy credit were onto something... or maybe it's just crypto currencies?
The VW logo above "BMW"...
ZIRP is the root of all evil.
crypto will pop if/when interest rates rise
It is a fiat bubble.