Archive for bubbles

De Coster Explains the Cupcake Bubble

220px-Chocolate_Cupcakes_with_Raspberry_ButtercreamThere’s the Skyscraper Index, and then there’s the Luxury Cupcakes and Breakfast Cereal Index.  That is, a six-dollar bowl of cereal may be an indicator that easy money is a little too easy to come by. Karen De Coster spots the latest warning signs for high-end cupcakes:

I called the cupcake bubble back in 2009. Post-economic bust, what started rising from the economy’s ashes was a series of economic “successes” whose popularity made no sense in an economy that was awash with bubble-bust carnage. Cupcakes were the most obvious an imminent mishap.

Later on, as cupcake pandemonia took firm hold and media stories gloated about the glory and popularity of those pricey-but-oh-so-special cupcakes, I was writing about the cupcake bubble and what was really driving the bubble madness that created endless malinvestments [ see definition ] in the cupcake business.

Yesterday, it was announced that Crumbs, the New York-based “cupcake empire” was going out of business. Forty-eight stores in ten states went kaput. The day that Crumbs mania hit its high and it was announced that the company was going public, I called it out as a favorable stock short.

I didn’t attack cupcakes because I hate cupcakes – I like an occasional cupcake every now and then. I merely latched onto an absurd fixation that was being fueled by something other than demand and productivity. From 2008 onward, the advent of government stimulus policies along with the Federal Reserve’s fight to keep credit cheap and money plentiful created market distortions that were making even the ridiculous seem profitable and real. Americans developed a strange obsession with enormous, sugar-laden, pricey mounds of sweets all dressed up in toppings and flavors suitable for the most discriminating 5-year-olds, and thus business malinvestments in the cupcake world ensued.

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The Growing Bubble–In Everything

Bubble_3Even the New York Times believes that there may be a bubble a-brewin’.  As NYT columnist Neil Irwin writes:

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

Signs of an incipient bubble abound.  The Art Deco office tower in Manhattan, assessed at $466 million by an industry publication three month earlier, sold for $585 million in May.  Spain, which suffered a debt crisis two years ago, recently sold bonds a the lowest interest rates since 1789.  In the largest junk bond deal in history, a French television company just borrowed $11 billion dollars at 4.875%.  Based on the S&P stock index, investments in American stocks average a return of 5.5 cents on the dollar, down from 7.4 cents just two years ago, while investments in Manhattan office buildings yield a rental return net of  expenses of 4.4 percent, lower than the rate  of return at the height of the last bubble in 2007.

In the meantime, ex-Fed Chair Ben Bernanke, now comfortably ensconced at the left-leaning Brookings Institution, has confided that he has changed his mind in assigning blame for the last bubble to a “global savings glut.”  In a recent interview, Bernanke explained:

I may have made a mistake in trying to assign a name.  A glut means more than is wanted. But it doesn’t necessarily arise because people want to save more. It can be because they invest less.  It’s entirely possible that if you look at the world, you have slow-growing advanced economies, China cutting back on capital investments, that the rate of return is just going to be low.

So once again Bernanke stands ready to blame market failure–this time, the failure to generate sufficient investment opportunities–for the devastating financial crisis that looms just ahead and whose actual cause is the Fed’s policy of recklessly expanding money and credit.

China Plans Railroad to Seattle, and More

125px-Flag_of_the_People's_Republic_of_China.svgThe Chinese government is desperate to keep its bubble economy going, and one way it’s doing that is by spending on massive infrastructure projects. The “China Bubble,” built on huge construction projects such as subways, skyscrapers, highways, and housing, continues to astound with the sheer numbers involved, from the height of the skyscrapers to the miles of track laid.

This sort of spending has become a central part of the Chinese economy:

In the last few years, cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s growth. Subways and skyscrapers, in other words, are replacing exports of furniture and iPhones as the symbols of this nation’s prowess.

This naturally has many political uses, from full employment to rising GDP growth, as noted by Doug French in 2011:

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