There have been a number of wild rides through bubbles in the last decade or so.  There was the dot-com bubble that closed out the 90’s and welcomed in the new millennium.  Then there was the financial bubble, the credit bubble, the housing bubble…

Arguably many of those are inter-related, and chances are, you were affected by at least one of them.

So where is the next bubble?

First, I’ve come to accept the fact that history will repeat itself.  We are all poor students of history, but deeper, no one can really understand all the forces at play to effectively stave off a repeat of a certain event.

With that, it’s realistic to assume there is another bubble brewing as we speak.

With all the government intervention in finances, and the U.S. Fed’s “as low as we can go” interest rate policy, I suspect the next bubble will be in interest rates.

If there is one thing that history tells us, and it seems those in power never seem to study enough, is that the Fed is notoriously late when it comes time to act on monetary policy.

Most recently, Fed Chairman Greenspan was slow to lower interest rates which kept borrowing at bay when borrowing was most needed.  To that tone, I suspect Fed Chairman Bernanke will be slow to raise interest rates in an effort to keep inflation at bay.

Since any sort of monetary policy is based on lagging economic data (by 3 months or so), it’s understandable why interest rate moves also suffer from the same lag.  Historically though, interest rate moves have been late to the game by as much as 8 and arguably 10 months.

In the end, I suspect Bernanke will delay raising interest rates until late next year, and he’ll be forced to raise them to levels he’d not anticipated to keep the wraps on inflation.

So what makes this the Mother Of All Bubbles?

In one word, China.

Unlike the past, the Chinese are taking a great interest in our monetary policy, primarily because they own so much of our debt and currency.  To say the Chinese aren’t really happy with how things are going would be an understatement.

The Fed wants to keep rates low for fears that increasing rates will hamper an economic recovery.  But the Chinese have more leverage in our debt than they do in our unemployment rate.  They’re really looking out for their own financial interests, and who can blame them.

The Chinese are worried that the current U.S. policy is creating insurmountable risks to the recovery of the global economy, and they’re worried we’ll bring them down with us.

Any freshman in a college history course knows that the Chinese will do just about anything to keep their economic freight train steaming down the tracks, and they’re not real happy about the prospect of U.S. monetary derailing that train.

They own a lot of U.S. debt, and they’re not afraid to use that debt to influence policy in the States.  Higher interest rates will appease them as it will increase the value in their holdings.  It’s only a matter of time before Bernanke will have to oblige.

Higher interest rates is what they’re looking for, and higher rates they will get.

I suspect that interest rates will be late to go up, and will go higher and stay higher for longer than they need to.   All in the name of keeping the Chinese at bay.

Banking, Economics, Finance bernanke, China, interest rates, monitary policy

According to a report out on Bloomberg today, China is continuing its curb on vehicles put in place on July 20th to help with the pollution problem ahead of the Beijing Olympics, which apparently was quite effective.  The air quality is better now than it has been in over a decade, and in fact, pollutant levels dropped by as much as 50% during the Olympics.

The city will “seal off” 30 percent of government and Communist Party-registered vehicles Oct. 1, the Beijing government said on its Web site today. It will also limit the time the remaining government vehicles, as well as company- registered and private cars will be allowed on the roads, it said. -Source

The city of Beijing also put a stop to building work and shut down factories during that same time frame.

The effort is actually quite elaborate.  For instance, the last number of a license plate of each car will determine which days that car will be disallowed from the roads in Beijing. Social organizations and various businesses are shifting work schedules to stagger the traffic flow.

Unfortunately, this means that I won’t be able to gauge what effect this curtailment has on oil prices.  A while back, I mentioned that around the same time China took the cars off the road and shut in manufacturing facilities, the price of crude oil started dropping.

Now that Beijing is going to keep the curb in place, it will be tough to tell if this was all simply coincidence or if China’s demand for crude is actually a measurable quantity in this regard.

Crude oil is down $30 since the curb went into effect.

Energy, Environment China, crude oil, Environment, Olympics, pollution

An Iranian OPEC official on Saturday mentioned that OPEC members are trying to decide whether to cut output to “shore up” market prices for crude oil.

“The market is oversupplied by at least 1 million barrels a day. If OPEC would like to remove this additional oil out of the market, then OPEC has to cut some production,” OPEC governor Mohammad Ali Khatibi told Dow Jones in a telephone interview. -Source

Oversupplied by only 1 million bbls per day?  Is that all?

Perhaps they should wait to see what demand looks like after China restarts manufacturing operations after the closing of the Olympics.  As I mentioned in a previous post, China had shut down manufacturing in an effort to reduce pollution in preparation for the games back at the beginning of July.  Right about the time crude prices started to slide.

Energy China, crude prices, Olympics, OPEC