What Will Be Our Next Economic Bubble?

When it comes investing, very few of us think about “defense” as much as we think about the “offense”. It’s easy to want to put money into something when the value of it goes up and up, but we never think about how it could come back down (and fast!). Sound familiar? Anyone with a mortgage knows this scenario all too well.

So as the major indexes begin to perk up, it’s natural to wonder:

• What will the next big economic bubble will be?

More importantly, how can I avoid the next big bubble and not become a victim? There are a lot of interesting theories and opinions out there. The following are a few recent ones I’ve collected.

What Happened to Our Economy? Read “Aftershock”:

One of my favorite reads this summer was the book about economic bubbles called “Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown” by David Wiedemer, Robert A. Wiedemer and Cindy S. Spitzer. “Aftershock” is a very thorough and technical examination of the events and trends that lead to the Great Recession, and where they will take us to next. Click here to read my review of “Aftershock”.

Basically, the events before the Great Recession can be attributed to four major bubbles:

• The “Real Estate” bubble – Home prices increased disproportionally to income

• The “Stock Market” bubble – Stock prices rose at unsustainable rates when compared to the rate of GDP growth

• The “Private Debt” bubble – Loans on homes and private equity went into default

• The “Discretionary Spending” bubble – As credit dried up, people spent less

Unfortunately, the trouble doesn’t end there. “Aftershock” makes some very alarming predictions about the future and the next two bubbles to come:

• The “Dollar” bubble – With confidence shaken, investments from other countries in US debt will fall. The Fed will have no choice but to print more money which will cause inflation to rise.

• The “Government Debt” bubble – Eventually the government will run out of money to support all the programs it currently sponsors, leading to massive disruptions across all industries.

Bear in mind that “Aftershock” was written in 2009 (it has since been revised in 2011). Unfortunately, the recent events this summer with the debt ceiling debates, European crisis, and bond market predictions provide haunting evidence to support some of the theories presented in this book. Definitely worth the read!

More Theories:

What sparked this post was a recent article I read on MSN entitled “What’s the Next Bubble?” These were the predictions presented in the article:

• Commercial real estate – Unemployment and lack of financing will draw down demand for commercial properties.

• Athlete incomes – If consumers change their discretionary spending habits, athletes may find themselves with less lucrative endorsement offers.

• College salaries, tuitions and student loans – The combination of higher professor pay, less student enrollment, and fewer federal loans could cause the entire system to implode.

• Gold – Based on the current high prices, many people predict this asset is already in a bubble

• U.S. Treasuries – If the economy does recover, investments in this asset will drop off rapidly as people return to equities

• Health care costs – If the costs continue to rise, they will simply be too high for anyone to pay

My Fears:

There are at least two of these bubbles I feel will spiral out of control.

Healthcare.

How high can these go before no one can afford them anymore? At my work, the costs we pay to the insurance company have risen exponentially over the years. At my wife’s employer, the contribution that the employees are required to pay for their healthcare coverage almost matches some of the lower-paid employee’s take-home pay; netting them almost nothing.

Putting aside the debate about whether it is better to have government-sponsored healthcare vs. private healthcare, how can we ask employees to chose between a paycheck or health insurance? What will the insurance companies do when no one can afford their prices any longer?

College tuition.

Since I’ve graduated college, the price for one semester of tuition has doubled. And that doesn’t even include room and board! I’ve also read many articles that predict that by the time my children are old enough to go to college, the prices will have more than doubled again.

The topic of student loans and the mountain of debt that people are taking on is increasingly rising. The tough thing about this form of debt is that, unlike a house, you can’t simply walk away from your student loan debt. It will follow you for life or until you file for bankruptcy. Questions are now starting to arise about whether it is even worth it to go to college anymore.

Combine these two observations with the fact that the median income in America has been little unchanged over the past twenty years and WE HAVE A PROBLEM! Like housing, how can Americans afford to pay to go to college if the jobs they plan on getting will NOT support the debt payments they will eventually be making?

There are a number of possible outcomes:

• The bubble pops and the price of college becomes reasonable again

• The price of college continues to rise to the point where Americans travel to other lower-cost countries to seek a degree

• Americans eventually stop going to college (because they can’t afford it anymore), and the white-collar jobs are all outsourced to other countries.

Remember to Use Income as Your Barometer:

Although no one can fully predict what the next bubble will be, it always seems that in retrospect the most tall-tale sign of a bubble is this:

• Is the price of the bubble item moving in parallel with our National income?

Plain and simple, if the price of an item goes too high, we won’t be able to afford it and we’ll eventually be forced to stop buying it.