Financial Bubble Predictions – 3rd Qtr 2017

Financial Bubble Predictions – 3rd Qtr 2017

Pundits are always predicting the next market collapse.  Ben Carlson does a great job of reviewing this and providing endless links in his piece Financial News Doesn’t Rhyme, But It Does Repeat Itself.

Since bubbles are always being predicted, and I am an optimist (or realist based on historical accounts), I thought it would be a wise endeavor to put together a quarterly piece on current bubble predictions.

By “requiring myself” to seek out dissenting opinions, it might help me see the other side of the market argument on a regular basis.  Here’s my first run at what will be a quarterly affair.  Below are the most prominent predictions for the current financial bubble and links to support.

Liquidity Crisis

JPMorgan has already named this future bubble the “Great Liquidity Crisis”.  This is supposed to start taking shape sometime in 2018 as Business Insider notes:

And while the firm isn’t sure exactly when the so-called Great Liquidity Crisis will strike, it figures that tensions will start to ratchet up in 2018, once the Federal Reserve starts to unwind its massive balance sheet.

It’s a fascinating article and worth a read.  It’s pretty detailed as many market collapse predictions are, but a quick Google search for anything close to liquidity crisis or Fed liquidity puts JPMorgan in small company.  Not a lot out there on this topic that isn’t already a few years old.

European Bank Crisis

Not surprisingly, European banks appear to be struggling due to their lackluster economies and the interest rate environment.  A Bloomberg article describes how the EU banks are still wading through the aftermath of the previous recession:

In allowing Italy to pour as much as 17 billion euros ($19.4 billion) into liquidating the two banks, the European Commission relied on its guidance that state aid for banks is justified “as long as the crisis situation persists, creating genuinely exceptional circumstances where financial stability at large is at risk.” The 2013 document, which replaced guidance from five years earlier, hasn’t been updated, meaning that as far as the EU is concerned, the crisis rages on and taxpayers can foot the bill when banks collapse.

Germany’s largest bank, Deutsche Bank, continues to struggle as well.

Deutsche Bank’s Issues Are in its Future as Much as its Past and Fitch just downgraded them again but at least notes that the outlook is stable.

The Populist/Independence Movements

I’ll just let you read the following article from zerohedge.com – 7 Independence Movements That Could Destroy the EU

A Google Search of Populist Movement Crisis yields some pretty interesting (and disconcerting) articles.

How these various movements will impact the stock market is a huge unknown.

Political Division and Trump

This is somewhat related to the above potential bubble.  And there is little empirical data to back it up, but whether you love or hate Trump (seems to be the only two options), you can’t argue that the division among the voter base is wide.

But beyond simple political division, investors are warned about repealing financial regulations and a repeat of what helped the Great Recession unfold.

And there is no bigger fan of the increasing market valuations than Trump himself, despite believing it was a bubble at Dow 18,000.

Beyond the stock market itself, ramifications of potential health care and tax reform will remain a question mark until something passes (if it ever does).  Though, even the idea of tax reform appears to spark bubble talk from a permabear.

Bond Bubble

Alan Greenspan recently called for the bond bubble to break due to the continued low-interest-rate environment. He worries that once rates rise, that they’ll rise quickly and turmoil will ensue.

Given the number of outspoken people that are disagreeing with his analysis, it makes me wonder if he might be right.

Worrying about the bond-market bubble is ‘old-guy’ thinking

Greenspan is wrong.  There is no bond bubble.

Why Greenspan is wrong about bubbles in bonds.

Greenspan’s bond bubble prognosis overblown

Given the level of outspoken disagreement, it seems reminiscent of the housing bubble.

The Student Loan Debt Crisis

This is one that has been pedaled for quite some time now.  I must say that it is a huge concern especially if we hit a full-blown employment crisis.  Zach Friedman from Forbes and Make Lemonade has a great article on the topic:

Student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans.

According to Make Lemonade, there are more than 44 million borrowers with $1.3 trillion in student loan debt in the U.S. alone. The average student in the Class of 2016 has $37,172 in student loan debt.

Perhaps most concerning of all is that even with strong employment numbers, more than 1 million borrowers defaulted on their student loans last year.

Overall, there were 4.2 million borrowers in default in 2016, up 17% from 3.6 million the year before, as some borrowers exited default while others remained in the red.

Unless you’re one of the lucky few, it’s tough to go to college without accumulating debt.  It only gets worse as tuition continues to increase with no relief in sight.

If you happen to be a parent about to send your child to college, please help your child make a financially smart choice by choosing a university whose tuition is on the lower half of the spectrum and to make a wise choice of major.  Getting a good-paying job out school is hard enough, doing it with a major that doesn’t pay well is even tougher.

China’s Debt Bubble

With China’s Total Debt to GDP percentage numbers rising at an alarming rate, China appears on a course for significant issues.  And since China has become the world’s second-largest economy, their financial position is critical.  Professor of Public Policy at Harvard, Ken Rogoff, explains here:

One of the world’s top economists has warned that China’s addiction to debt and reliance on investment-led growth will trigger a severe financial shock when its unsustainable economic model implodes.

He said: “Credit has been growing faster than the economy every year, sometimes at double the rate of the economy, and that can’t go on forever. Even if they slow down to the point where credit growth rises at the same rate as the economy, Beijing will have a problem. When you have the train running at such a high speed, one bad patch of track can catch you out.”

To say it will be interesting to see how this one plays out would be an understatement.

These seven potential bubbles appear to be the primary nominees to take down the stock market.  It’s predictions like these that makes investing so hard.  They are everywhere, all the time.  Having an investment portfolio that is in line with what your goals call for can help you stay the course.  Knowing your plan of action in advance of a market decline is what will allow you to exercise patience and discipline when the going gets tough.

If you have other ideas of potential bubbles looming, I’d love to hear from you!

 

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