 America's Bubble Economy UNDERSTANDING HOW WE PREDICTED THE CURRENT BUBBLEQUAKE FOUR YEARS AGO IS KEY TO UNDERSTANDING WHY OUR LATEST PREDICTIONS ARE CORRECT When our first book, American's Bubble Economy, came out in 2006 (the book proposal was actually submitted 18 months earlier), we were right and almost everyone else was wrong. We don't say this to brag. We say it because it's important for understanding why you should bother to pay attention to us now. America's Bubble Economy (John Wiley & Sons), accurately predicted the popping of the housing bubble, the collapse of the private debt bubble, the fall of the stock market bubble, the decline of consumer spending, and the widespread pain all this was about to inflict on the rest of our vulnerable, multi-bubble economy. We also predicted the eventual bursting of the dollar bubble and the government debt bubble, which are still ahead. In 2006, these and our many other predictions were largely ignored. Two years later, it started coming true. How did we see it coming? Certainly not by looking only at current conditions, which, at the time we wrote the first book, still looked pretty darn good. In fact, real estate prices were close to their record highs in 2006. With home values high and credit flowing, American consumers were still happily tapping into their home equity and credit cards to buy all manner of consumer products, from diapers to flat screen TVs, importing goods from around the world, boosting the economies of many nations. Businesses and banks appeared to be in good shape (very few banks were even close to failing), unemployment was relatively low, and Wall Street was still on an upward climb toward its record closing high (Dow 14,164) a year later on October 9, 2007. With so much seemingly going so well back in 2006, how could we have been so sure that the housing bubble would pop, private credit would start drying up, the stock market would begin to fall, and the broader multi-bubble economy, here and around the globe, would begin a dramatic decline in 2008 and beyond? Our accurate predictions were not a matter of blind luck, nor were they merely a case of perpetual bearish thinking finally having its gloomy day. In 2006, we were able to correctly call the fall of the U.S. housing bubble and its many consequences because we were able to see a fundamental underlying pattern that others were-and still are-missing. In this pattern, we saw bubbles. Lots of them. We saw six big economic bubbles linked together and holding one another up, all supporting a seemingly prosperous U.S. economy. And we also saw that each conjoined bubble was leaning heavily on the others, each poised to potentially pull the others down if any one of these economic bubbles were to someday pop. In this pattern, we also saw the opposite of big airborne bubbles; we saw the evolving economic facts on the ground. As is always the case with bubbles, the facts on the ground did not justify the volume of the bubbles; therefore sooner or later, we knew they would have to burst. In a little while, we will tell you more about our six big economic bubbles (the first four have already begun to burst and the other two will shortly) and how we knew they were bubbles. For now the point is that economic bubbles, by nature, do not stay afloat forever. Sooner or later, economic reality, like gravity, eventually kicks in, and bubbles do fall. After they burst, they never are able to re-inflate and lift off again. In time, new bubbles may grow, but old popped bubbles generally do not take off again. When the party is over, it's over. Most people, even most "experts," find it much easier to recognize a bubble (like the Internet bubble of the 1990s) after it pops. It is a lot harder to see a bubble before it bursts, and much harder still to see an entire multiple-bubble economy before it bursts. A single, not-yet-popped bubble can look a lot like real asset growth, and a collection of several not-yet-popped bubbles can look a whole lot like real economic prosperity. We wrote America's Bubble Economy because, based on our unique analysis of the evolving economy, the facts on the ground did not match the bubbles in the sky. By that we mean high-flying asset growth that is not firmly pinned to some underlying real economic driver is not sustainable. For example, real estate prices are typically driven higher by a growing population (increasing demand) and the growing incomes of homebuyers (increasing ability to buy). When populations increase and incomes increase, home prices also increase. On the other hand, if you see home prices increasing, let's say, twice as fast as incomes, then that could mean something unusual is happening to the value of real estate. Why? Because home prices that high are not sustainable without a similar rise in the ability of buyers to keep paying those prices. Asset bubbles are not always bad. On the way up, they can lift part or all of an economy and spur future economic growth. This certainly was the case with the housing bubble. On the way down, however, they can cause real problems. In fact, the bigger the bubble, the harder the fall. Our first book identified several economic bubbles that were once part of a seemingly virtuous upward spiral that first lifted and supported the U.S. economy over many decades, and are now part of a vicious downward spiral that will inevitably harm the U.S. and world economies as these sagging, co-linked bubbles weigh heavily on each other and ultimately burst. These bubbles included: the real estate bubble, stock market bubble, discretionary spending bubble, dollar bubble, and government debt bubble. Despite how well the economy appeared to be doing in 2006, we predicted it would only be two or three years before America's multiple bubbles would begin to decline and eventually even burst. And that is just what happened. By the third quarter of 2008, home prices and sales had fallen significantly, mortgage defaults and home foreclosures were skyrocketing, commercial and investment banks were going under, unemployment was rising, and the stock market bubble had fallen from its peak of 14,164 in October 2007 to under 7,000 (DJIA) not much more than a year later. We now offer you this second book in late 2009, as the rest of our conjoined economic bubbles are under tremendous downward pressure and about to fall. Unlike at any other moment in our history, there is something fundamentally different going on this time. Even people who pay no attention to the stock market or the latest economic news say they can just feel it in their gut. Something is different. This is not merely a down market cycle, nor is it a typical recession. The difference is the multi-bubble economy. With so many linked bubbles now on the descent, the impact of their combined collapse will be far more dangerous than any downturn or recession we've experienced in the past. Unlike in a healthy economy, in this falling multi-bubble economy, the usual strategies for returning to our previous prosperity no longer apply. We have, in fact, entered new territory. We call it a Bubblequake. As in an earthquake, our multi-bubble economy is starting to rumble and crack. Clearly, the real estate, credit, and stock market bubbles have already taken a serious fall, and the financial consequences for the broader U.S. and world economy have been terrible. Next comes the Aftershock. Just when most people think the worst is behind us, we are about to experience the cascading fall of several, co-linked, bursting bubbles that will rock our nation's economy to its core and send deep and destructive financial shock waves around the globe. The Bubblequake fall of the housing, credit, consumer spending, and stock bubbles significantly weakened the world economy. But the coming Aftershock will be far more dangerous. A multi-bubble economy cannot be easily re-inflated. Rather than home prices stabilizing and the U.S. economy recovering in the next year or two, as many "experts" want you to believe, we see serious, groundbreaking new troubles ahead. In fact, the worst is yet to come. That's the bad news. The good news is the worst is yet to come (with emphasis on the word yet). There is still time for individuals and businesses to cover their assets and even find ways to profit in the Bubblequake and Aftershock. But first you have to see it coming. Because We Were Right, Now You Can Be Right, Too Most people think the economy will get better soon. It won't. We can tell you what you want to hear, or we can help you enormously by showing you how to prepare and protect yourself while you still can, and find opportunities to profit during the dramatically changing times ahead. We may not give you news you like, but it will definitely be news you can do something about. Now is not the time to look for someone to cheer you up. Now is the time to get it right because you won't care in three years if someone cheered you up today. What you will care about is that you made the right financial decisions. It matters more now than ever before that you get it right today. Please remember this important point as you go through the rest of the book: It's only bad news for your personal economy if you don't do anything about it. Before we go on, we should take a moment to assure you that we are neither bulls nor bears. We are not gold bugs, stock boosters or detractors, currency pushers, or doom-and-gloom crusaders. We have no particular political ideology to endorse, and no dogmatic future to promote. We are simply intensely interested in patterns, big evolving changes over broad sweeps of time. And because we look for patterns, we are willing to see them-often where others do not. At the time we wrote America's Bubble Economy, we saw, and continue to see, some patterns in the U.S. and world economies that others are missing. We see these patterns, in part because we are very good at analyzing the larger picture. In fact, co-author David Wiedemer has developed a fascinating new "Theory of Economic Evolution" (introduced briefly in Chapter 8) that helps explain and even predict large economic patterns that most people simply don't see. But there's more to it than that. We can see things happening in the economy right now that many others do not because at this particular moment in history, it's very hard for most people-even most experts-to face what is actually going on. The U.S. economy has been such a strong and prosperous powerhouse for so long, it's difficult to imagine anything else. Our goal is not to convince you of anything you wouldn't conclude for yourself, if you had the right facts, based on objective science and logical analysis. Most people don't get the right facts because most financial analysis today is based on preconceived ideas about a hoped-for positive outcome. People want analysis that says the economy will improve in the future, not get worse. So they look for ways to create that analysis, drawing on outdated ideas like repeating "market cycles," to support their case. Such is human nature. We all naturally prefer a future that is better than the past, and luckily for many Americans, that is what we have enjoyed. Not so this time. Again, just to be clear, we are not intrinsically pessimistic, either by personality or by policy. We're just calling it as we see it. Wouldn't you really rather hear the truth? At an April 2008 presentation about America's Bubble Economy to Hogan & Hartson, one of the nation's largest law firms, co-author Robert Wiedemer said he wished people would treat economists and financial analysts as doctors rather than people trying to cheer you up. What if you had pneumonia and all your doctor did was just slap you on the back and say, "Don't worry about it. Take two aspirin and you'll be fine in a couple days." Wouldn't you prefer the most honest diagnosis and best treatment possible? But when it comes to the health of the economy, most people only want good news. Even in the face of some very damning economic facts, people still want convincing analysis of why the economy is about to turn around and get better soon. The vast majority of financial analysts and economists are simply responding to the market. That's what people want and that's what they get. Despite this universal desire for good news, and despite the fact that the housing and stock markets were both near their peaks in 2006, our first book did remarkably well. In fact, America's Bubble Economy has been discussed in articles in Barron's, Reuters, Bottom Line, and the Associated Press. The book was also selected as one of the 30 best business books of 2006 by Kiplinger's. Co-author Robert Wiedemer has been invited to speak before the New York Hedge Fund Roundtable, The World Bank, and on CNBC's popular morning show Squawk Box. So clearly there are people who are interested in unbiased financial analysis, even when that analysis says there are fundamental problems in the economy that won't be resolved easily or soon. Yet even within this supportive audience, and among our most devoted fans, there is still a wish for optimism, a deep-down feeling that the future couldn't possibly be as bad as we say. We understand that. All we can offer is realism, based on facts and logical analysis. In the end, that is what's best for all of us. Our original analysis showed us that the real estate bubble would be the first to burst, putting downward pressure on the stock market and discretionary spending bubbles, kicking off a major global recession. Now, in this book, we want to tell you more details about the next round of bubbles to fall while there's still time to protect your assets and position yourself to survive and thrive in this dangerous, yet potentially highly profitable new environment. Just like in the first book, our analysis is based on a reliable theory of economic evolution, backed up by cold, hard facts, and not random guesses. Although much of what we predicted has come true, there is still much that we predicted in our first book that hasn't happened yet because most of the impact of the multi-bubble collapse is still to come. This is good news because it means you still have time to get prepared. Didn't Other Bearish Analysts Get It Right, Too? Not really. Back in 2006, there was a small group of more bearish financial analysts and economists who correctly predicted some slices of the problems we are seeing now. We say hats off to them for having the courage and insight to make what they felt were honest, if not popular, appraisals of the economy. It takes guts to yell "fire" when so few people believe you because they can't even smell the smoke. However, there are times when smart people make the right predictions for the wrong reasons, or for incomplete reasons, and that makes them less likely to be right again in the future. In this case, there are some important differences between our way of thinking and the typical "bear" analysis, which we think you ought to know about. For one thing, a lot of bear analysis tends to be apocalyptic in tone and predictions, sometimes going so far as to call for drastic survivalist measures, such as growing your own food. Unlike these true Doom-and-Gloomers, we see nothing of the kind occurring. (Continues...) |
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