Last Wednesday I was at a local Financial Planning Association meeting and the speaker indicated that in “his opinion” were in an “energy (gas) bubble”, a “weak dollar bubble”, and possibly an “interest rate bubble”. A bubble is when something has reached a peak, or tipping point, and starts going the other way. You can usually tell when we are in a bubble because news headlines start looking euphoric. For example, in March 2004 (think real estate bubble) the Sacramento Bee ran an article entitled “Strong Real Estate Market Creates Bidding War”. On September 3rd, 1999 (think tech bubble) the Wall Street Journal ran an article entitled Bursting Mr. Greenspan’s Bubble. The authors was downplaying Alan Greenspan’s concerns of a stock bubble saying that “…no one has ever found convincing evidence of such a bubble for the U.S. market as a whole”. Now, after the tech bubble and real estate bubble, it appears everywhere you look we hear of talk of bubbles. Here are a few:
Gas Bubble – How about those gas prices? Crude is closing on $120 a barrell. A gallon of gas is projected to reach $4.00 by the middle of summer. While not a US newspaper, the Calgary Herald ran an article today entitled “Crude forecast to reach $225 US“. If you google “oil bubble” or “commodity bubble“, you’ll find all sorts of articles speculating that we are in an oil bubble. What is even more interesting is that many think oil prices are related to another bubble: dollars.
Dollar Bubble – How weak is the dollar going to get? I went to Europe last fall and paid $1.45 per euro. It has almost reached $1.60 this year. The Canadian dollar is 98 cents. A weak dollar has promoted some industries in the US like manufacturing and tourism, yet it has others (think China) concerned. A recent article from Xinhua China entitled “Crude prices approaches 120 dollars on weak dollar, supply concerns” says that some in China think that a weak dollar promotes higher oil prices. According to the CIA website, China is also the third largest consumer of oil behind the US and Europe.* They should be concerned. Their oil consumption is growing and they hold a lot of US dollar ($1 trillion in US assets, $330 billion in Treasuries alone). Their Treasury concerns may be slightly alleviated from the next bubble: interest rates.
Interest Rate Bubble – While lower interest rates may indirectly help mortgage companies and mortgage owners with variable rates, interest rates cannot stay this low if inflation continues to rise because the Federal Reserve uses interest rates as its main weapon to combat inflation. This is illustrated below:
Year – Interest Rates – December Inflation Rate
2005 – 4.25% – 3.42% (low interest rate/higher inflation)
2006 – 5.25% – 2.54% (high interest rate/lower inflation)
2007 – 4.25% – 4.08% low interest rate/higher inflation)
In January of 2008 inflation peaked at 4.28%, but has lowered slowly. The Fed has cut rates to 3%. Should we see inflation to continue to lower while interest rates are low, we might see mortgage help AND lower inflation. But this is unlikely, and chances are that inflation will rise and so will interest rates.