The next big bubble to burst?
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12-12-2012, 01:40 AM
RE: The next big bubble to burst?
(12-12-2012 12:51 AM)bemore Wrote:  If I a brutally honest I only started learning about economics a few years ago by studying on the internet, spurred on by learning that conspiracy videos only contain half truths or dont fill in all of the blanks (dont worry I wont be posting conspiracy in here lol)

Id like to think I know a little bit, probably the very basics and thats about it.... however when I compare my knowledge base with people like you muffs.... who is studying this at university, I know I might be a teeny bit out of my depth Blush

Partly reason why I wanted this subforum, to talk about it these things and to learn further.

Im guessing that maybe part of the problem (with regards to bonds) may be down to the low interest rates at the moment. Maybe not to the issuer but maybe the investor?
Bonds are pretty easy concept to get.

Bonds if you don't know are issued by a company (or government) as a way to generate cash (often for expansion programs if it's a company. There are several reasons why a government would issue new bonds, ie: war time bonds which is self explanatory. But also it's ways of controlling interest rates.) (should note that bonds are not really my specialty). They are used to generate cash for a company in the same way that a company would issue shares (aka stock). The difference between bonds and shares though is that shares (as the name suggests) represent a percentage of a company. ie: if a guy owns 100% of a business, he can then incorporate (listed on the stock exchange and issue shares and several legal reasons) and issue a number of shares representative of a certain percentage of his company. ie: He may put up for sale on the stock market 100shares representative of say 50% of his company. If his company was worth $200 each share would then start by costing $1 (this then changes as the business changes etc..).
The downside to this is he only owns half of his company now.
Bonds on the other hand the same man could issue 100bonds set at a fixed percentage for return.
So he may set 100bonds (at the $100) with a 5% return every year for a fixed period (often 5years I believe but it varies).
What this means is every year this man will pay out 5% ($5) and then after it reaches maturity (the date at which it "expires"), in this example after 5years, the man then pays back the original price of the bond to the bond owner.
So for this example, you'd pay $100, get $5 a year for 5 years and then you'd get your $100 back.

The upside to bonds is that you don't lose a percentage of your company like you do with shares. The down side is you have to pay that money you get back after time of maturity. You also HAVE to pay out that 5% where as with shares you don't have to pay out a return (but often companies do).

Where trading etc of bonds come in is with interest rates.
It's inverse. High interest rates result in lower bond prices where as lower interest rates result in high bond prices.
Typically low bond prices are better for long term (buy low, sell high).

So how this works: Say with our man above he issues 1 bond at $100 with 5% return. This means that that bond pays $5 ever year.
Now say the market interest rate is 10%. This means I could invest my $100 elseware and receive $10 return each year.
So to make this $100 bond at 5% seem attractive, you can't change the interest rate (which is fixed. Though there are floating bonds but whatever, majority are fixed) BUT you can change the price.
So to make this bond now worthwhile the price needs to be reduced from $100 to $50. $50 because 10% of $50 is $5 which is the return on this bond.
So if the market rate was 10%, the bond price of a bond issued at $100 with a 5% interest rate would be $50.

The opposite is true if the interest rate falls. The bond becomes more valuable and so the price rises.

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12-12-2012, 01:55 AM
RE: The next big bubble to burst?
(12-12-2012 01:40 AM)earmuffs Wrote:  The opposite is true if the interest rate falls. The bond becomes more valuable and so the price rises.
Thanks for typing that up muffs.

What would happen if interest rates went into the negative?

For no matter how much I use these symbols, to describe symptoms of my existence.
You are your own emphasis.
So I say nothing.

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12-12-2012, 02:38 AM
RE: The next big bubble to burst?
(12-12-2012 01:55 AM)bemore Wrote:  
(12-12-2012 01:40 AM)earmuffs Wrote:  The opposite is true if the interest rate falls. The bond becomes more valuable and so the price rises.
Thanks for typing that up muffs.

What would happen if interest rates went into the negative?
Negative interest rates are loss. At 0% it's the same as stuffing your money in a mattress and doing nothing (well.. to be accurate it'd be investing (by putting it in the bank or something more pro-active) at equal rate of inflation. ie: if inflation is 5% and I invest in something with a 5% return, technically I've earned nothing).
Basically if something is a negative interest rate, nobody will invest in it (unless it's predicted to improve and become profitable).
It doesn't happen very often. It's done when the nominal interest rate is less then inflation.
So like for example, say the interest rate is set at 5% and inflation is 1%. This means that the real interest rate is 4%. This being because money is worth less over time.
What you are talking about occurs when the nominal rate is less then inflation so for example say inflation is 10% and interest rate is set at 5%. This would result in a real interest rate of -5%.
It's done as a way of basically charging people to save. It basically forces people to spend and invest because it's expensive not to.
What effect this has on the bond market I'm not 100% sure, but it will certainly cause an increase in bond prices, simply based off supply and demand. I imagine bonds would skyrocket in price.
This could certainly produce the bubble you were speaking off if then the real interest rate was to return to normal as those bonds would rapidly decrease in price.

I suspect it would take a while however and a government would have plenty of time to correct the issue before it got too bad.

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12-12-2012, 03:25 AM
RE: The next big bubble to burst?
The same "bubbles" that always burst.

X borrows alot, x looks good because on the books it looks like he is gaining, then x creates a bubble.

The shit is still going on now, all of the things that led to the current crisis are still going on and all of the attempts to save the economy by loaning more money to banks (giving) isn't saving anything.

Has anyone here read a book called The Commanding Heights? The book and the documentary made from the book was released during the clinton presidency when the bubbles were getting fat and everything looked good. One thing I particularly love is in this documentary there is a section where they of course spew the typical diatribe against communist economy and the whole documentary is praising the new world economy.

And this always gets my rocks off, I rewind this section and watch it again and it really gets my rocks off, there is a section of the documentary that mentions the new methods in which computer models can predict profit, of course this turned out to be a total fraud, but in this documentary they are jizzing over themselves in praise of this new economy and it's new methods as the then economy was on the rise after that bad communist nation fell.

I truly love it.
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12-12-2012, 04:36 AM
RE: The next big bubble to burst?
I'm with germanyt on this one. The student loan bubble is going to be a massively bloody, pus filled semen, bloated nutsack explosion.

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12-12-2012, 05:55 AM
RE: The next big bubble to burst?
Indefinitely student loans.

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12-12-2012, 07:06 AM
RE: The next big bubble to burst?
(12-12-2012 12:29 AM)earmuffs Wrote:  
(11-12-2012 09:05 PM)bemore Wrote:  In the UK we have the recent company pension reforms.

https://www.gov.uk/workplacepensions/?


Which will see people and companies diverting funds into this... to the pension companies... who then have capital to keep investing in what I think is the next bubble.

Bonds and gilts market.
The bond market?

Very unlikely.
And if it were to unfortunately happen that would be a total shit storm, the whole economy revolves around the bond market, even the stock market revolves around the bond market.
Think great depression Xbillion.
From the U.S. perspective bond buying is known as the QE's however if the economy does rebound how will the economy avoid an extreme hike in inflation since currently on the books exists this massive amount of liquidity due to the bond buying?

Bubble time

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17-12-2012, 05:07 AM (This post was last modified: 17-12-2012 05:40 AM by Bucky Ball.)
RE: The next big bubble to burst?
Not sure it will be an actual bubble bursting, but it seems the pros are expecting a big dip, coming soon in the markets. The S & P is rather seriously ahead of itself, historically. The dollar was acting funny last week, and didn't respond as expected to the Fed announcement. But the student loan total in higher than credit card debt, so that will almost certainly crash. I think 10-20 years from now, the entire education system will be changing, responding to on-line classes for almost all the basics. I suspect many colleges will fail and close. Those that don't respond to the new paradigm are doomed. So, in a away, the brick-and-mortar education system, (IMO) will be a bubble in it's own right.
(Of course you can easily make dough as markets fall, and since panic and fear is stronger than greed, short-selling, and put-buying is a great way to make a bundle, since markets drop faster than they rise). There are those who think a (buy the rumor) "sell the news" reaction to the solution to the Fiscal Cliff, may start it down, for six months.

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17-12-2012, 05:35 AM
RE: The next big bubble to burst?
Latest news flash!

GOLD FOUND ON MARS!

Go West (er, east, south... um, I dunno) Young Man.

Now, will all the get-rich-quick greedy fuckers get off my fucking planet.

Thanks

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23-12-2012, 06:03 PM
RE: The next big bubble to burst?
(17-12-2012 05:35 AM)DLJ Wrote:  Latest news flash!

GOLD FOUND ON MARS!

Go West (er, east, south... um, I dunno) Young Man.

Now, will all the get-rich-quick greedy fuckers get off my fucking planet.

Thanks

Drinking Beverage
Wait, are you serious?

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