Bubble Watching

I knew something bad would eventually happen.  As a young boy in Shreveport, we would regularly ignite fireworks without adult supervision. Often these fireworks were loaded as if we were going to war. Being boys with unlimited courage (or foolishness), we would deviate from the prescribed manufacturer’s guidelines (there were none). 

Typically, we would get the most potent firecracker a/k/a Black Cats.  We would light the firecracker and release it at the last minute.  Of course, someone would attempt to be most courageous and wait even longer.  Yes, you may guess it.  Someone would eventually get hurt. However, we dared not to let an adult know.  

Likewise, our financial situation is in a crisis across the globe.  Yet, most business institutions continue to act in an unwise behavior which eventually will get them into trouble, a/k/a a bubble burst.   

A bubble can be defined as “whenever an asset’s perceived or psychological value exceeds its real economic value.”  It’s not rocket science in understanding bubbles. For example, people purchased overpriced homes that they could not continue to pay for.  The housing market’s bubble burst.  Millions of dollars came tumbling down with this bubble.  Therefore, bubbles can be toxic.    

Some bubbles are easier to see than others.  For example, Europe may be looking at a very rocky financial future.  In its book Beyond Austerity: A Path to Economic Growth and Renewal in Europe, the McKinsey Global Institute outlines the trouble that Europe faces: “The challenges Europe faces are serious-more so for some economies than others.”  

Europe’s political will is unable to change its social model.[1]  In 2009, EU-15’s productivity rates were 15% lower than the United States. In fact, Europeans work, on average, 5 weeks less than workers in the U.S. (U.S. workers are among the best in the world in productivity).  

Their seasoned citizens (ages 55-64 –years old) do not actively participate in work activities compared with the senior population in America. Many of their social services are provided by the government which puts a heavier burden on resources. Europeans are reluctant to change their current social model that is driving them into an economic ditch.  Consequently, a bubble will eventually burst. 

However, America cannot believe it’s immune to a bubble crisis like Europe.  John Wiedemer, Robert Wiedemer, and Cindy Spitzer, authors of America’s Bubble Economy, correctly predicted the 2008 economic crisis several years before it happened. 

 

Additionally, they predicted that America is headed for an even worse economic crisis, regardless of the political parties in charge.  They understand the power of understanding bubble trends:  “…the bursting of America’s bubble economy will create a temporary Bubblequake of shockwaves here and around the world, depressing stock and real estate values, driving up interest and inflation, and throwing the U.S. and other economies into temporary global recessions.”[2]  The following elements are what the authors saw as bubble busters for the American economy before the 2008 bubble burst:

  • Huge international trade deficits that just keep getting bigger.
  • An astronomical $8 trillion federal government debt, heavily financed by foreign capital.
  • Ever-expanding consumer debt with no equal rise in consumer income.
  • The lowest savings rates in America’s history.
  • A national housing market that has climbed 80% in the last several years while income rose only 2%.
  • An economy that is now heavily dependent on historically low interest rates and low inflation rates that require massive foreign capital to maintain.

 Clearly, those predictions were made for 2008.  However, has anything changed since then as it relates to these elements?  Consequently, those organizations that watch bubbling trends, analyze them, and act accordingly have the greatest opportunities for sustainable success. 

Discuss a potential bubble in your industry and how an organization or individual can leverage this problem into an opportunity? 

© 2012 by Daryl D. Green


[1] Beyond Austerity: A Path to Economic Growth and Renewal in Europe by the McKinsey Global Institute

[2] America’s Bubble Economy by John Wiedemer, Robert Wiedemer, and Cindy Spitzer

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15 thoughts on “Bubble Watching

  1. For the railroad industry to stay in business we have too stay competitive in two areas, price and efficiency. An issue that I feel can be seen on the horizon is the use of fossil fuels. Industries are trying to find new areas and cheaper ways to extract fossil fuels such as oil from the earth. According to The Wall Street Journal (2012) “The energy industry figured out that a combination of technologies—hydraulic fracturing and vertical wells that turn underground to run horizontally through oil-rich rock—could free petroleum and natural gas trapped in dense rock formations”. With these dramatic increases in oil extraction such as hydraulic fracturing energy experts say the U.S could increase the number of barrels by 250,000 barrels per day. Therefore, what happens when these energy sources run dry? Oil prices will increase dramatically with low supply and high demand causing logistic rates to increase, and causing businesses to find alternative solutions to their logistic needs. Causing the railroads to cut routes and positions in order to try and save their business.

    Reference

    Gold, R. (2012). Oil and Gas Bubble Up All Over. The Wall Street Journal. Retrieved from

    http://online.wsj.com/article/SB10001424052970204464404577112681942517356.html

  2. The railroad industry is actually taking a different approach. Instead of searching for alternative fuels to power their locomotives, railroads are trying to re-invent their locomotives to conserve fuel. The company I work for has built a prototype locomotive known around the diesel shop as the “Manhattan Project” that According to Gulf and Ohio Railways (2012) will offer “fuel savings up to 30%”. While the locomotive is still only a prototype other larger companies such as Norfolk Southern and CSX are already interested in the locomotive and are currently conducting running tests.

    Reference:
    Gulf and Ohio Railways. (2012).

  3. You’ll know the U.S. energy industry is really on the rebound when North Dakota’s newfangled Bakken oil field starts pumping more crude than Alaska’s stalwart Prudhoe Bay. Energy experts expect it to happen in 2012.

    Dwindling production from the once-mighty Alaskan field has been a symbol of what was once seen as the slow, inexorable decline of U.S. oil. But new technologies have turned that overall decline into an increase, led by the Bakken shale, which in July produced 424,000 barrels a day, to Alaska’s 453,000.

    Rising oil production from the Bakken and other nontraditional fields is expected to add 250,000 barrels of oil a day to U.S. production, according to the International Energy Agency, even as conventional oil production falls. If overall trends continue, daily U.S. oil output could be up by 1 million barrels a day by 2016, to 6.6 million.

  4. Healthcare is currently an over-inflated bubble in the United States that is primed to explode. High costs, overall care, and reform have been hot topics for debate in the last half decade. President Obama made healthcare reform a high priority during his campaign and immediately took action in this direction upon entering the Oval Office. This new legislation is now known as the Patient Protection and Affordable Care Act. Being employed in the healthcare field (retail pharmacy), I have been anxious to see what changes will take place as the government begins to settle into its new, larger role. However, I do believe that the strategies that companies create to protect themselves from potential infrastructure failure in the wake of these changes should be highest on their current priority lists. Kaufman’s (2011) “Three Brutal Facts,” article about the healthcare bubble, states that “prepared organizations will focus on meaningful transformation into a provider system comprising data-driven, digitally connected, patient-centered healthcare.” This is a formula that will result in long-term sustainability for companies who are staying proactive in the ever evolving field of healthcare regardless of when the bubble bursts.
    References
    Kaufman, N. S. (2011). Three “Brutal Facts” That Provide Strategic Direction for Healthcare Delivery Systems: Preparing for the End of the Healthcare Bubble. Journal of Healthcare Management, 56(3), 163-168.

    • You are right Josh the healthcare industry is a major bubble that will burst. In my article (Nelson,2012) reported that Lakeshore Mental Health Institute’s budget was $22.4 million dollars. When you break that down it can pay for a lot of other services that will fill needs that patients have that are currently not being met. When I worked in surgery some of the instruments that we used were disposable and worth approximately $1200 each. The sterile drapes alone were a huge cost to the hospital which was tranferred right down the consumer. When the healthcare bubble bursts it will have dire consequences in several areas of the healthcare industry.

      Reference: Nelson, K. (2012, May 5). Lakeshore Funds to be Reinvested into Community Mental-Health Services. Retrieved from Knoxnews.com: http://www.knoxnews.com/news/2012/may/05/lakeshore-funds-to-be-reinvested-into-community/-118k

    • It is perfectly understandable that you are anxious to see what changes that take place as the government becomes more involved in healthcare. The banking industry is heavily regulated by government agencies, as they should be. However, at times they go beyond what is necessary because without fully understand the impact of their short-term goal. For example, the government strongly “encouraged” banks to participate in the Troubled Asset Relief Program (TARP) to build consumer confidence in the financial system. Then they wanted to charge banks hefty penalties to pay the money back early. In addition the Consumer Financial Protection Bureau (CFPB), created through the Dodd-Frank Act, placed regulations on banks which “curtailed traditional bank fees, costing them billions of dollars. Banks were barred in 2010 from automatically enrolling customers in a service that charged them as much as $35 for overdrafts on their checking accounts” (Gogoi, 2012). This means that banks have to find other ways to make up for the lost revenue, which in the end impacts the customer – such as no more free checking accounts.

      Gogoi, P. (2012, March 01). Even after backlash, banks quietly pursuing fees. Knoxville News Sentinel. Retrieved Oct 06, 2012, from http://www.knoxnews.com

  5. Lakeshore Mental Health Institute had a long life but was draining the budget and it closed its doors on 6/30/12. per (Nelson, 2012)-“This plan, for which Lawrence said contracts are still being negotiated, would put $22.4 million ($20.5 million reallocated from Lakeshore Mental Health Institute’s budget and the $1.9 million from a state pilot program to divert Lakeshore Mental Health Institute’s patients to other facilities) toward inpatient hospitalization, monitored alcohol/drug detoxification programs, intensive long-term support services, liasons for jailed mentally ill people, crisis services, and respite, peer support, and transitional support services.” Some of the agencies slated to receive allocated funds were Helen Ross McNabb Centers, Ridgeview Psychiatric Hospital, Cherokee Health Centers. The huge drain that state psychiatric hospitals create due to housing certain patients long-term without some type of profit making ventures was a bubble that was bound to burst sooner or later. The allocation of community based programs is a good thing but unfortunately there are some individuals that are too ill to prosper safely in a community based program such as support living departments. Time will reveal the true reality of this plan’s benefit to the individuals and the community.

    Reference: Nelson, K. (2012,May 5). Lakeshore Funds to be Reinvested into Community Mental-Health Services. Retrieved from Knoxnews.com: http://knoxnews.com/news/2012/may/05/lakeshore-funds-to-be-reinvested-into-community/-118k

    • I agree that the Lakeshore situation was a bubble that was bound to burst. Even when the institute was still in business, it seemed nothing good was said about it. The former CEO of Lakeshore stated, “There was some denial. People thought ‘well, you can’t close this hospital. We’ve been here 100 plus years.’ We’re very important to the community, but they never lost focus on the patients” (Lake 2012). I believe that when there is denial that there is an end to something than it is at risk for a “burst”. Just as many investors, real estate agents and consumers did not think that the housing market would change so rapidly.

      Resource:

      Lake, H. (2012) Lakeshore Mental Health Hospital Closes Its Doors for Good. WBIR. Retrieved from
      http://www.wbir.com/news/article/224962/2/Lakeshore-Mental-Health-Institute-in-Knoxville-closes-its-doors-for-good

  6. Bubbles are present in many different industries at different times. The housing bubble which recently effected United States and really the entire world due to the amount of foreign investment is a prime example. Another possible bubble that Chris Isidore discusses is the automotive market in China. He states, “More cars were sold in China last year than in any other country at any time in history “. (2011) That shows that the market is currently great, however that success will not last forever just as it did not in the housing market in the US. Isidore also stated, “The combination of slowing growth and increased investment could become a prescription for overcapacity sooner rather than later. That may turn the industry’s biggest success story into its biggest headache before long”. (2011) This “bubble” could effect the US and its economy in many ways, especially since GM is currently the leading auto maker in China. (Isidore 2011).

    Isidore, C. (2011). The Chinese Auto Bubble Threat. Retrieved from http://money.cnn.com/2011/01/12/news/companies/china_auto_bubble_risk/index.htm

    • Cindy,
      It is amazing to think that China will be experiencing the same problems that we have had here in the United States. They could be “capable of producing 40 million cars annually by 2015 or about 35% more than the market could absorb” (Oliver, 2011). If they are producing that many cars, where are we going to put all of the old ones? Or the new ones for that matter? The economic leaps they have made in the last quarter century are staggering. It just makes you wonder how long they will be able to maintain this breakneck pace.
      References
      Oliver, C. (2011). China faces auto-manufacturing bubble. Retrieved from http://articles.marketwatch.com/2011-02-28/news/30970867_1_hong-kong-china-bubble

  7. The next potential bubble points toward student loans. After the mortgage crisis of 2008 left so many people without jobs it created the perfect opportunity for individuals to go back to school and finish their education. Some are simply brushing up on their current skills while others are embarking upon a new path and going back to college to prepare for a career change. Either way, college enrollment is on the rise. With this rise in demand, the cost of tuition rose dramatically. Most will not be able to afford tuition at the increasing rates and will need the help of financial aid, either by Pell grants or student loans. According to Pope (2011), “Everybody wants in. The idea that higher education is the only way to get ahead has become widely held. College enrollment has surged one-third in a decade. With rising demand, college tuition and fees have more than doubled over that time, outstripping inflation in every other major sector of the economy – energy, health care and housing, even when housing was bubbling itself.”

    Reference: Pope, J. (2011, November 6). Student loans: The next bubble? Retrieved from http://www.huffingtonpost.com/2011/11/06/student-loans-the-next-bu_n_1078730.html

  8. “Experts say college tuition has increased by 5-600 percent over the last 25 years yet the average starting pay for a graduate is 25 thousand dollars and that’s if they can find a job.”(Blackwell) With jobs wanting more education and technology knowledge more and more people are going back to school to get degrees to be more brand able to companies. With the job market getting smaller and smaller you need more to get the job that you want. So more and more students are getting student loans that go all the way through school and add up to around 50,000 by the time they graduate.
    Reference: Blackwell, L. Rising Student Loan Debt Could Be Next Financial Crisis.www.abc32.com

  9. The banking industry is dealing with the aftermath of the mortgage bubble. The government and banks both played a role in the mortgage bubble. However, banks became the scapegoat with little scrutiny place on the government’s role. The economic impact of bearing the brunt of the financial crisis has been devastating to the financial industry. Approximately 450 banks have failed since 2008. On July 21, 2010, President Barack Obama signed into law financial reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Dodd-Frank Act addresses more than mortgage reform. In fact, a large portion of “consumer protection” regulations have impacted how banks earn revenue. According to Gogoi (2012) “regulatory rules since 2009 have also curtailed traditional bank fees, costing them billions of dollars.” The banking industry is evolving. The bottom line is banks have three options: find a way to do more and more with less staff, merge with another bank, or sell.
    Gogoi, P. (2012, March 01). Even after backlash, banks quietly pursuing fees. Knoxville News Sentinel. Retrieved Oct 06, 2012, from http://www.knoxnews.com

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