September 30, 2004
The Bubble Economy
A new book by John Calverley,called Bubbles and How to Survive Them is making waves. The central premise of the book is that the housing and dot com booms were not one off events but rather are a harbinger of the way things will be if action isn’t taken. At present the principle threat today is from housing bubbles, but other asset markets look vulnerable.
The problem has arisen in part because, over the last couple of decades, Central banks have become so good at controlling the business cycle that periodically large rises in unemployment and inflation are no longer commonplace. The price however, fueled by the persistently low interest rates in the US, is a wall of liquidity that is currently sloshing about the world’s asset markets.
Some of these bubbles, such as in the UK and Australian housing market are well known. Others such as the recent bubbles in shipping are also I believe part of this bubble economy. As you can see from the graph below at the beginning of 2002 tanker (and most bulk shipping rate) tripled in the space of a couple of months. Most of this was put down to speculation and prices fell back again but at the beginning of this year they started heading for the stars again. I’d speculate that the current high oil prices are a not entirely unrelated to the bubble in the tanker market. Of course you could argue that the tanker price rises are simply the natural response to higher oil prices caused by higher demand and restricted supply. But the ramping in the tanker market looks to me more indicative of a bubble so I’m predicting 30 dollar oil by January next ye
