Most all bubbles are a misallocation of resources. We build more houses than we need, we bid stocks up to unsupportable levels. What it really works out to, at the height of the bubble the end purchasers pay too much for an overvalued item and lose everything. At the time they have comfort in the fact, that everyone is doing the same thing.
Our government has manipulated interest rates to almost zero (ZIRP). Using the rule of 72 which states dividing the interest rate into 72 yields the years to wait for your bank savings to double. Right now that is about 144 years. So if you want to invest your savings, why put it in the bank? The government is forcing people away from saving money in the bank to other forms of investment, the biggest two are the stock market and real estate rentals. Plus if the bank gives you zip on your savings, why not spend it now and enjoy it, there is no reward for saving—not in my life time or even my sons.
At some point in the future, when both the workers and the government are spending with no tomorrow in sight, there will be a shortage of product to consume. With a shortage of product, prices have to rise for those who really want to have it.
There are people saving like me for retirement, I’m 68. I just learned that by deferring my Social Security to age 70 I get to pay more for Medicare by about 50%. I can’t possibly live off of the interest on my savings. When I started saving, I was counting on a 5% interest rate at retirement. Notice who gets hurt with the low government interest rates, people who have saved money. We are not talking rich people, we are talking people that have managed to save a million dollars over a life time. At 5% interest, that’s about $50,000 a year for two to retire on until you have to be put in a rest home. Right now, that will return about $6,000 a year, not much for a life time of savings.
The real issue that has to be looked at, is that we are no longer a nation of savers, we are a nation of spenders. With both government spending and consumer spending, we will run out of product to buy not dollars. The government can print dollars, but it cannot print product, and the surplus product that will disappear, is the product that was available for purchase only because someone previously decided to save instead of consume. All of the printed money in the world cannot buy a car that was never built.
If 40 million food stamp shoppers want steak and lobster, guess what, chicken becomes a real deal.
And of course, if you want corn in your gas tank instead of in you cattle, steak becomes more expensive.
Notice one thing, almost everything mentioned has to do with government intervention. They can screw up anything and ask for your blessing at the same time.
It is very interesting growing old. Young people have no idea what I am talking about and people that are my age, nobody listens to. A little old lady the other day bought 3 hallmark cards and some expensive prescription drugs, and the total was $175. She put it on a credit card, I wonder if the balance will ever get paid off in her life time?
An FYI nugget
In today’s newspaper two different Investment funds each bought rental complexes in San Diego. A 35 unit one for 5.4 million, rents bumped up from $1,050 to $1,225, many on Social Security are moving out. Then a 208 unit luxury living complex bought for 84 million by Monogram Residential Trust of Texas projects rents on this one being built will be about $2,500 a month. The second one they paid double of what they should have IMHO. Both companies are trying to get a decent return on their investment. The only thing being overlooked is that rental returns are based on vacancy rates. You can charge any rate you desire, but the actual rental rate is determined by the rent collected over 12 months divided by 12 months. If it rents for $2,500 a month and is empty 6 months of the year, the net rental rate is $1,250 per month. The newspapers conclusion was that rental rates were rising, while at the same time in the first building everyone is moving out.
This is what made the Great Depression of the 1930's. What you wanted and expected from your investments, was not what you got. There was a disconnect that no one could comprehend.