THREE MINI-BUBBLES ARE BURSTING
By John Rubino
The world has gotten so used to ultra-low interest rates that even economists and money managers seem to be shocked by what happens when rates start creeping back towards normal levels. Some of the mini-bubbles that formed in an essentially free-money environment are now starting to leak. Notably: U.S. Housing. While the action in this sector is nothing like the raging mania of the 2000’s, prices in many hot U.S. markets are at all-time highs, while affordability is at or near an all-time low. And now rising mortgage rates are beginning to bite.
Cars and trucks have been one of the economy’s bright spots for several years – which seems to have gotten everyone just a little too excited. Auto financing practices have lately begun to resemble those of the subprime mortgage bubble: Today’s average loan is for more money, lasts much longer, and is held by a much weaker credit than ever before. Now, with interest rates rising and pretty much every potential buyer already locked into a car mortgage, the bubble optimism is evaporating.
China is the world’s second largest economy – with a debt load that has quintupled in the past seven years. The story in a nutshell is that China responded to the Great Recession by borrowing more money in the following half decade than any other country ever, and wasting a big part of the proceeds. Now its banking system is cracking under the strain of mounting bad debts, and newly-rich Chinese are getting their capital out of Dodge at a rate that if allowed to continue will bring on a full-scale credit crisis.
None of these, not even China, are by themselves enough to destabilize a global financial system that’s still awash in new credit. But all three at once? Maybe. And of course there are more potential eruptions waiting in the wings, what with the Italian bank bail-out getting harder as deposits flee those sinking ships and U.S. stocks at record levels and thus due for a correction. So whether or not these current dramas amount to anything memorable, they clearly represent limits on the global financial bubble. More such limits will emerge shortly.