Where My Mind has Wandered

What is the next bubble?

Of late, Americans have a knack for engaging in spectacular economic fiascoes.  First there was the dot com bubble, then the real estate bubble. Our penchant for get rich schemes is amazing. My mind has wandered to a very simple rule of thumb: if everyone is getting rich in exactly the same way, the majority of people involved are going to get hurt. 

So what is next? I don’t think the Chinese product recall really qualifies. Yes, it is somewhat self-inflicted. And yes, the steady movement of consumer product and ingredient manufacturing to China was largely fueled by efforts to make as much money as possible. But not at a level that involved the average American. Sure we benefited from the high quality, $6 t-shirts we bought for our kids, but most of us aren’t getting rich from Chinese manufacturing.

I think the next bubble might just be the huge rush in America toward bio fuels. I’m all for adding more renewable energy into our energy diet, but a lot of money is being poured into corn and soybean farming. So much so that I wonder if the market really needs it all, particularly if you consider all the crop subsidies that are in place. And we don’t know what the secondary impact of the investment will be. If speculators lose money there will be a ripple effect, but the average person may not be impacted that much unless the shift to crops for energy impacts other parts of the economy.

I have a friend who recently moved to Wisconsin to start an organic farm. She is going to grow and sell organic vegetables, but her main crop will be hay. Why hay? She says so many farmers have switched to farming crops for fuel that it has created a hay shortage. It sounded like an awfully broad claim to me. This summer we drove 12 hours from St. Louis to Michigan, and I have to say the number of crop fields in Northern Illinois and Indiana with bio diesel signs along the highway was astounding. It is a bubble candidate for sure, but maybe not to the extent of the technology and real estate bubbles.

What else could be the next bubble? If you have an idea, let me know, I’ll look into it because I am dying to know.

Sub-prime loans are only part of the real estate story.

The current focus on sub-prime loans (note Google News Reference Volume) makes sense, I suppose, but the real estate bubble is a lot larger than just the sub-prime market. Speculation by investors had a lot to do with the rise in volume of sub prime loans, as did historically low interest rates, as did the desire among low-income families to own homes. However, speculation was hardly limited to the sub prime market.

The developers were selling lots, the builders were selling homes, and the buyers were snapping them up as fast as everyone could secure a loan. Otherwise prudent investors were buying second and third homes, looking for a quick profit. And not the inexpensive vacation homes and cabins of our parent’s generation. A half-million for a house by the water was nothing, and peoples were plowing their savings into $200,000 - $300,000 condos before they were even built. The results are easy to see. Below are some data points from a recent Fortune article by Tom Garnder:

Year over year, building permits are down 28%, building starts are down 16%, and foreclosures are up 35% nationwide. The sentiment indicator of the National Association of Home Builders is at a 26-year low. Shares of one residential construction company after another have fallen at least 40%.

A visit to some resort communities in Florida will reveal plenty of empty lots, unfinished buildings, and for sale signs. The very rich may be riding this one out, but many of the everyday rich are feeling the pinch. Even prudent investors were often hurt by the swift turn in the market.

The speculation impacted buyers who were looking to buy their primary residence as well. The surge in home prices made houses harder to reach, and therefore made variable interest loans with a low initial rate more attractive.  For many people in hot markets, even middle to upper-middle income families, it was an appealing way to stretch into a house that four years earlier might have cost 25 percent less. Even if these families can continue to meet their increased monthly payments as interest rates rise, they will have significantly less disposable income, and that has to impact the U.S. economy.

The signs were there. The articles were abundant. Most people had plenty of warning and simply elected to ignore it. I can’t fathom why, and I am hoping we get a little smarter before the next bubble hits.

My wife and I bought a house four years ago, near the peak of the residential market. Not great timing, but we were ready to move. My father told me that if I planned to live in a house seven years or more the smart play was to put as much as I could muster into the down payment and get a fixed rate, 30-year mortgage. With interest rates at historic lows I thought that was good advice and I took it. The value of my house may not appreciate five to 10 percent a year for the next five years, but it will hold its value until the market recovers and my monthly payments won’t increase.

Southwest Airlines: Crisis Meets Corporate Blog

In March I wrote a post about the Southwest Airlines company blog. Southwest is experiencing a public relations crisis so I thought I'd take a look at the blog and see how the company was handling the issue.

In July a Southwest Customer Service Supervisor removed a young woman from a Southwest flight because he thought her attire was inappropriate. He ended up letting her back on the plane after she adjusted her clothing, but not apparently before he gave her a lecture. Last week the story exploded after the woman appeared, wearing the same outfit, on NBC's Today Show.

The issue is an odd one for Southwest. It has the image of the fun-loving, casual airline. It is treasured as the airline for the average person, where everyone is treated equally. And anyone who has flown the airline can attest to the cavalcade of flip-flops and tan lines presented by passengers of both sexes.

The reaction of Southwest customers and the online public has been strong. The blog posts and comments are emotional, and most are very critical of the airline. What is interesting is that some of the debate is playing out on Southwest's own blog. The company elected not to make a statement, but instead linked to a post on MSNBC by Dan Fleschner, a producer of the Today Show. In the post Fleschner writes "But when she sat down, we learned just how short that skirt was -- when she flashed our national television audience. Yeah, that skirt was short."

This twist in the story did lead to some support appearing on behalf of Southwest, but I'd estimate the negative comments still outweigh the positive by a ratio of 4 to 1. I think it was smart of Southwest to to keep its blog up and running. And it was brave and smart to leave comments open and allow the negative comments through. It must have been hard for the moderators to read the raw, emotional criticism from their usually fawning customers and then post it for the world to see.

Acknowledging the story on the blog must have been an interesting decision. I think linking to the MSNBC story vs. making an official comment was probably a mistake. It was a statement without making a statement, and it came off a bit snide to me which just doesn't feel like Southwest.

As for the issue itself, debates over appropriate behavior and dress will never be resolved. They have been with us for centuries. I think the real question is “how was the original situation handled?” Airline staff are trained how to approach and resolve challenging situations with customers. I am surprised the supervisor confronted the woman in front of the other passengers. If he had raised his concerns out of earshot of other passengers this situation may not have escalated. If it was indeed handled poorly, if the confrontation was public, and if the passenger was truly lectured, then I think it is an example of poor training or poor employee performance. The young woman was going to be embarrassed even if she was addressed with respect and understanding, but she would have likely dealt with it and moved on. What upsets people is when they are treated roughly, without respect and compassion.

Britney Spears at the VMAs

The VMA awards were just getting underway and already the Internet was on fire. Both Britney Spears and her performance were being eviscerated before she had even made it to her dressing room. The photos followed, then the video, and the posts and comments just kept on coming. The public responds to news and events so quickly now that the news cycle has compressed to the point that it is practically live coverage. It happens so fast the viewers participate in the story.

For the record, I think I know what was wrong with poor Britney Spears. Look at her feet. Her heels were much too high. She could barely walk. She was tip-toeing around the stage and she could hardly keep her balance. It seems pretty obvious to me. She wasn't taking long strides; no sudden movements above the waist. Just about what you would expect from someone in heels that high.

No, I did not watch the VMAs. I am working late on a Sunday night and saw the story on Yahoo! News in between emails. That is how I consume news -- online, throughout the day, and in short bursts.  And if a story catches my eye, I can wade in deeper and if I am motivated to do so, I can participate.

If you want to understand the impact of the Internet on the nature of news consider this a case study.

Photo: Getty/Wireimage/AP