Below I covered how to spot when a bubble is developing, now here's an easy way to spot if you are in a recession. Again, people with PhDs have likely studied this, but you can see a recession coming just by watching TV. No, not by paying attention to the news, but by watching the advertisements.
Now, during economic slowdowns companies selling consumer products still need to advertise their offerings or risk losing market share. But they still need to cut costs, so you will notice recycled TV ads. As in you will see an ad for Corona, but the ad is a year old, which during good times does not happen as much. By re-using old ads, the companies save on the production costs of new ads and since they have already been used, they know the ads are effective. Or at least I would assume they would only re-use effective ads.
I noticed this back during the 2001ish recession, and again last year. The first ad this time around that I clearly remember being recycled was one for AT&T's wireless division (I think it actually started under the Cingular brand name). Remember all those "more bars in more places ads?" Cute at first, but overtime have become tired. The one I recall being re-used was the one with the dad off on a business trip sending pictures of his trip back home to his wife and daughter, until the last picture is one from outside the house. Cute, but after the orignal run they moved on to new ads and I believe new campaigns, but then last year this ad with the dad made a come back. And I'm not the only one who has noticed the long run of the ad.
The other ads I've noticed of late is the old McDonald's Dollar Menu ad with the guy going around what looks like New York City with a dollar bill asking what he can get for a dollar. He gets a dry cleaning hangar/bag and a plastic palm tree and then becomes happy at McDonalds. Then there is Corona and there ad with the guy skipping his smartphone off into the ocean (side note: if you are in a Corona state of mind that apparently accompanies all Corona drinkers, why even take the phone on vacation let alone onto the beach?). And the latest one I have seen is from Lowes. Sure they have their new LowesT ad where they find creative ways to add a T at the end of the logo, but they have now begun re-airing the ad with the dad telling his son how good of a negotiator he is that he got free delivery and free installation and so on, the same things everyone gets at Lowes, and the same add from a while back.
So, watch for more, and in a few years if you see it happening again, watch out for an economic slowdown.
Friday, November 06, 2009
Friday, October 23, 2009
Bubble economics
Long overdue thought on how to spot a bubble in a market. Hopefully some economists with PhD have realized this and have published it somewhere with actual statistics.
You know a bubble is forming when: 1) Long-term financial/economic theories such as supply and demand are replaced by short-term greed. Or in other words, people ignore long-held financial maxims and react with greed instead of sound investment strategies. 2) This short-sightedness becomes acceptable to the general public or investing community.
Case examples:
1) Housing bubble of 2007ish: Here, a variety of factors led to this bubble and subsequent crash. First, lenders threw out sound loan practices (failure of part 1 above), and then many consumers jumped on board the ARM bandwagon (failure of part 2 above). Then you also had the advent of flipping. Certainly not a new concept, but many, many people took on this practice to make a quick buck. Of course, flipping is really just a huge pyramid scheme that inflates demand as people usually could not afford these second homes, and by pushing up the price and reducing supply while the home was being upgraded, this screwed-up the supply-demand curve. In many cases this was done by ignoring convectional wisdom that you do not buy a second home unless you can always afford the mortgage payment (failure of part 1). Failure of part 2, the widespread acceptance comes to us via TV shows such as Flipping Out and Flip that House.
2) Oil bubble that led to $4+ per gallon gasoline in 2008: Basically a fear driven bubble and a series of events that reduced production. Here, as we have all been told, if gas gets to $4 per gallon like it is in places like Japan and Western Europe, then demand will fall, as those countries generally use less gas per person than in the US. Again, simple supply and demand economics were ignored by investors looking to profit by the rising price of crude, as alternatives become more feasible as do more expensive production techniques/processes for harvesting more oil this will take hold and lower demand. We have always been told that expensive gas is the cure for US dependence on foreign oil. As to part 2, when T. Boone Pickens jumps on the bandwagon of oil going to be super expensive, then I think that qualifies as becoming acceptable to the investing community.
3) Dot.com Bubble of 2000: Greed drives stock prices through the roof, only to plummet once people figure out that companies spending $10 million a year but bringing in only $5 million will not actually last that long. Here, the main conventional wisdom was that you don't do IPOs for companies that don't make money, and you don't invest with companies that have not figured out how to even generate revenues to pay bills. Sure, a few companies like Amazon were able to grow big enough and eventually become profitable, but companies like HomeGrocer.com and many others never panned out. These companies had spent lavishly on IT equipment and computers and tech in general, which also created a bubble in those industries as the growth could simply not be sustained once everything fizzled out. To recap, part 1 comes from people looking for huge stock gains via purely growth instead of looking things like ROI or P/E. Part 2 comes from everyone and their mother jumping into the stock market to try and cash in on the next big thing.
So that's it. In essence, bubbles are really big pyramid schemes. You will do fine if you got in early enough, but get burned if you get in too late. And in the end, most everyone gets burned either directly or indirectly when the bubble bursts and recession ensues.
You know a bubble is forming when: 1) Long-term financial/economic theories such as supply and demand are replaced by short-term greed. Or in other words, people ignore long-held financial maxims and react with greed instead of sound investment strategies. 2) This short-sightedness becomes acceptable to the general public or investing community.
Case examples:
1) Housing bubble of 2007ish: Here, a variety of factors led to this bubble and subsequent crash. First, lenders threw out sound loan practices (failure of part 1 above), and then many consumers jumped on board the ARM bandwagon (failure of part 2 above). Then you also had the advent of flipping. Certainly not a new concept, but many, many people took on this practice to make a quick buck. Of course, flipping is really just a huge pyramid scheme that inflates demand as people usually could not afford these second homes, and by pushing up the price and reducing supply while the home was being upgraded, this screwed-up the supply-demand curve. In many cases this was done by ignoring convectional wisdom that you do not buy a second home unless you can always afford the mortgage payment (failure of part 1). Failure of part 2, the widespread acceptance comes to us via TV shows such as Flipping Out and Flip that House.
2) Oil bubble that led to $4+ per gallon gasoline in 2008: Basically a fear driven bubble and a series of events that reduced production. Here, as we have all been told, if gas gets to $4 per gallon like it is in places like Japan and Western Europe, then demand will fall, as those countries generally use less gas per person than in the US. Again, simple supply and demand economics were ignored by investors looking to profit by the rising price of crude, as alternatives become more feasible as do more expensive production techniques/processes for harvesting more oil this will take hold and lower demand. We have always been told that expensive gas is the cure for US dependence on foreign oil. As to part 2, when T. Boone Pickens jumps on the bandwagon of oil going to be super expensive, then I think that qualifies as becoming acceptable to the investing community.
3) Dot.com Bubble of 2000: Greed drives stock prices through the roof, only to plummet once people figure out that companies spending $10 million a year but bringing in only $5 million will not actually last that long. Here, the main conventional wisdom was that you don't do IPOs for companies that don't make money, and you don't invest with companies that have not figured out how to even generate revenues to pay bills. Sure, a few companies like Amazon were able to grow big enough and eventually become profitable, but companies like HomeGrocer.com and many others never panned out. These companies had spent lavishly on IT equipment and computers and tech in general, which also created a bubble in those industries as the growth could simply not be sustained once everything fizzled out. To recap, part 1 comes from people looking for huge stock gains via purely growth instead of looking things like ROI or P/E. Part 2 comes from everyone and their mother jumping into the stock market to try and cash in on the next big thing.
So that's it. In essence, bubbles are really big pyramid schemes. You will do fine if you got in early enough, but get burned if you get in too late. And in the end, most everyone gets burned either directly or indirectly when the bubble bursts and recession ensues.
Thursday, April 09, 2009
Bumper Stickers
- Anything worth saying is worth saying with a bumber sticker.
- I learned everything I need to know from a bumper sticker.
Thursday, January 22, 2009
OK, I've got the solution to the economy. We cash in on Obamamania! We sell t-shirts, signed pictures, toast that looks like him, etc. Anything related to the inauguration. This should generate a bunch of revenue for folks like eBay and Amazon as well as small time websites making bumper stickers.
Of course, if it takes off we might end up with an Obamabubble. The banks will move in and started offering adjustable rate loans and no income check loans to help people finance their Obama merchandise purchases. Uou'll get people coming in buying stuff up to just flip and artificially inflate the price. Then we'll have top find a new bubble, maybe green energy can be next.
Of course, if it takes off we might end up with an Obamabubble. The banks will move in and started offering adjustable rate loans and no income check loans to help people finance their Obama merchandise purchases. Uou'll get people coming in buying stuff up to just flip and artificially inflate the price. Then we'll have top find a new bubble, maybe green energy can be next.
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