Spotting the Next Bubble, Part Two

In the previous post, I talked about the methodologies I use to spot a bubble in progress and (hopefully) profit from it.  I left a spoiler of sorts, that I think we have a bubble in progress right now and are on our way to yet another recession.  In this post, I’ll expand on why I think we’ll be facing another recession, and why I’m so convinced of it.

The Fed gets a great deal of credit in some circles for reducing the severity of the 2007-2009 recession.  The Fed printed and loaned trillions of new dollars to institutions with bad assets on their books (AIG, Bear Stearns, Citi, Fannie Mae, etc.), preventing those institutions’ outright failure.  Austrian economic theory says the Fed will ‘pay’ for printing that extra money with price inflation or another major bubble.  The gist of the Austrian theory is simple: there’s no such thing as a free lunch; the Fed’s actions guarantee another, more painful recession down the line.  We now have the initial data points on the path to proving the Austrians right (once again).

So where might the next bubble be?  Consumer discretionary spending.  The National Retail Federation reported an estimated $52 billion in Black Friday Weekend Spending, and spending per shopper was up a whopping 9.1% from a year ago.  Personal income was up only 3.9% over the same period.

After a brief spike in 2008, consumer savings have plummeted in 2010-11.  Personal consumption expenditures are up 8.6% since the recession began, while incomes are up only 6.6%. Consumer credit in September 2011 was at 97.2% of recession levels, but that’s up significantly from a low of 94.9% only 13 months earlier.

Personal savings are significantly higher than they were in 2007, up about 41%.  Note, however, that savings is assets minus debt.  So, debt that’s paid off, or even charged off as uncollectable due to default, pushes up the estimate of personal savings.  Even savings, though, have plunged.  Personal savings were up a whopping 175% versus 2007 levels as recently as May 2009.

Put simply, consumers are back to spending more than they have again.  The pain of the recession that will likely follow this latest binge could be immense.  Consumers will (again) be tapped out.  State and local governments are buried in red ink or barely recovering.  The Federal Government will likely try to borrow the difference and spend it as stimulus, poking the sleeping bond market bear one more time.  If U.S. bond yields top 5%, Fed Governor Ben Bernanke will likely panic and crank on the printing presses once more.  We’d effectively have a new national wallpaper: our own debauched currency.

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About Matt Murphy

I'm a software engineer with a certain company you've probably heard of. In my free time, I'm an advocate for individual liberty and free markets.
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