There are several trends in the present world that, according to Stein's Law, will come to an end. These can be described as: the dollar bubble, the bond market bubble, the real estate bubble, and the stock market bubble. In some ways, these are not four discrete things but four manifestations of the same underlying condition.Let's start with the dollar bubble:
Over the past decade, East Asian central banks have manipulated the dollar, pushing it to unsupportable levels. This has made East Asian exports far cheaper than our domestically produced goods and has encouraged the continued outsourcing of US factories to East Asia. Much of this outsourcing has been done by "American" corporations--corporations that though organized under and protected by the laws of this land have no apparent loyalty to this nation or its citizens.The bond market bubble:
...real interest rates are negative. One consequence of these negative long-term interest rates is the current real estate bubble. Negative interest rates represent "free money" in that loans taken out now can be repaid with watered down currency in the future with the borrower keeping the difference in real purchasing power. The East Asian nations, and in particular China, are willing to subsidize America's buying binge because of the strategic advantage they gain as we become more and more dependent on imports for so many of the items we find necessary for modern living.
The real estate bubble:
Home prices peaked in August 2005. There will still be positive year over year comparisons for a few more months. But prices are now going down, and very likely they will continue to go down for many years to come. Get used to it. These $200,000 homes that were selling for $500,000 just last month will eventually sell for $200,000 again, if not far less.The stock market bubble:
Finally, the stock market has peaked as well. The cyclical bull market that took us from around 750 on the S&P 500 in October 2002 to as high as 1248 just a few months ago is over. Higher energy costs (gasoline, natural gas, heating oil, etc.), the end of the cash out refi mania, higher monthly minimum payments on credit cards (courtesy of the new bankruptcy law), all these make a slowdown in the economy inevitable. Lower income Americans are already suffering at the pump. Where it will really get ugly is with home heating bills this winter. Add higher interest rates over the next few months courtesy of the Fed, and a sharp contraction in the economy is pretty much unavoidable.And finally:
Katrina marks the end of an era. The wonderful fantasy of consumption funded by ever-increasing home equity had to end sooner or later. With Katrina we descend from an imaginary world to a very real one: a world of diminishing energy supplies and decreasing asset values. Call it "the post-Katrina world."