The "Bubble" Theory

It seems that economists are more than willing to throw away a new term these days. Although it has been used sparinly in the past, the word bubble seems to be the definition of choice for confounding economic problems. So let me discuss the current usage of the word, and what it may mean for you.

The Bubble word really gained notoriety in 1999 at the time when the Tech Stocks tanked. The term used widely then was that the "bubble" had burst. The claim was that during the 90's, people were demanding so much of any tech stock, many times with little overhead needs, that eventually when one stock busted, all did. The bubble that had been created with over demand, had burst, causing a huge rift in the entire stock market. The bubble terms was used quite extensively over the next two the three years.

Fast forward to 2005. Now there exists two bubble coexisting. The first is the housing market bubble. Home sales have increased every year for at least 10 years now, possibly longer. Many economists have been forecasting the definite slowdown for at least 5 years. So the only way to explain the hot market, use the term bubble. This way, if they predict that home sales will cool off, and the bubble bursts, they were right. However, if the bubble doesn't burst, then the sales are only adding to the size of the bubble. Easy out for all. But since I work in a bank and see possible mortgagees every day, let me give you my take on the housing market.

Home sales are strong, possibly not as strong as a year ago, but rates have held steady. As the Fed has raised rates now for 10 consecutive times, you have seen something quite interesting, home rates have steadied or fallen each time. This market is becoming much more independent that originally thought. With the advent of interest only loans, it keeps the home market red hot. Now here comes the problem, if only half of those that have taken a interest only loan fail to pay any on their principal, then in five years, they are no better off then they are today. And that assumes that their house continues to appreciate. Appreciation is only happening as demand rises. If demand falls, so does the appreciation rate. Now five years later, you can no longer get a interest only loan, and you haven't moved forward on the principal.

What this does is n essence restart the whole cycle again. Interest rates will rise as the market slows down and many homes, especially new builts, will go unoccupied. But like all markets, it will self correct itself, and we will be talking about a bubble again in the future. The only issue I have right now is the overuse of the word bubble. Economists throw the word in whenever they need to sound like they know what is happening. If they predict a slow down, and the opposite happens, well then the bubble must be growing. If the market does slow down, well then they were right. Economists aren't in to being wrong too often.

Now onto the other "bubble". As many of you have found, gas is a little high. And the big word I have heard recently is and oil bubble. Fox News had a guest from the Cato Institute and discussed his take on the recent oil hike. He noted that oil cycles in twenty year increments. The last being the upswing of 1981 to 1986. The problem now, like then, is that there is not enough refineries to turn the oil into useful items. And now with the growing demand of China( currently 1.5 million barrels/day to the U.S. demand of 900,000), there is a glut in getting the product to the consumers.

OPEC is actually producing 1 million more barrels a day then last year, so you can't really blame them. If what happened in 1981 holds true this time, then what should happen is that more companies will enter the market hoping to grab market share. The more refineries that exist, the more oil that can be refined. Eventually, probably within 3 to 5 years, the market will be overrun with companies in the oil commodity market and the extra production will help drive down prices as well as give us plenty of oil for the future cycle. In essence, the bubble should burst, and if the tech stock stumble is any sign, we should all be happy with prices in the short-run.

So there you have it, two bubbles at one time. One we want, the other we don't. But the truth is that we as economists never want to be wrong. So the next time you see or hear an economist on the television or on the radio discussing the newest bubble, take to mind that there is a really good chance that he/she had no really good way to explain the recent phenomena, so the term bubble gets applied.