Street Talk

Street Talk: Where’s the bubble and when will it burst?

Not so funny.

September 12, 2014
Text Size:

Who can forget the U.S. real estate bubble that burst a few years ago and nearly blew up the world economy? Before that, there was a crazy run-up in value of almost anything to do with the Internet, culminating in the bursting of the dot-com bubble in 2002.

Is there another bubble fixing to burst?

Mitch Stapley studies the stock market on a daily basis in his role as chief investment officer at ClearArc Capital Inc., a division of Fifth Third Bank in Grand Rapids.

“We have to acknowledge right off the bat (that bubbles are) a natural part of market cycles,” said Stapley. Cycles go from extreme undervaluation to extreme overvaluation, “and I think we’re moving into that in the government bond market,” he said.

He noted last week that 10-year U.S. Treasury bonds were yielding 2.43 percent on an annualized basis. Based on the long-term average, that should “probably be closer to 5 percent,” he said. In fact, since the 1950s, it has averaged about 5.9 percent.

Government bond rates are “well below long term averages — and that’s a global phenomenon.”

They are even lower in Europe and Japan.

When interest rates are low, bond values go up because more people want to invest in them. You can buy a bond and perhaps sell it after a short time and make a little profit.

Bond values today are a result of the Federal Reserve’s “quantitative easing” program enacted during the Great Recession to keep interest rates low so the economy doesn’t overheat. But now, noted Stapley, quantitative easing is predicted to start going away, perhaps by late November. That means interest rates could start rising — and the bond market will drop.

The bond market won’t suffer as big a drop in value as equities in a bear market, “but it’s a bubble, it’s going to burst, and it’s going to cost people some money.”

GVSU’s Seidman College of Business Associate Dean Sridhar Sundaram was asked if the huge amount of student debt in America is a bubble about to burst. If students go into debt for $80,000 or more to get a degree and then can’t find a job, how are they ever going to pay it back?

He said there is a similarity between student debt today and the home mortgage debt in 2008. Mortgages were lumped together and sold on a secondary market, and there wasn’t any way to separate out the good ones from the bad ones that weren’t going to be repaid.

“Similarly, we see that happening with the student loan debt,” said Sundaram.

On the other hand, home values also declined dramatically starting in ’08, adding fuel to the fire. That won’t happen in student debt because the asset underlying the debt is education, Sundaram said.

The risk of the student debt bubble bursting is declining as more people are employed, he said.

Student debt involves 40 million borrowers, and those who are delinquent are a small fraction of the total, he said, “so I’m not as concerned at this point — unless the economy starts to decline.”

His biggest concerns are “external threats” in other parts of the world — events that panic the global markets and chill economies. Those could happen in regard to Russia and Ukraine, the real estate market in China, or war in the Middle East.

But the uncertainty about the cost of education in the U.S. does bother Sundaram.

“Is the federal funding, the state funding, going to continue or decline?” he asked. If it declines, there has to be a substitute source to cover the cost because “there is no other alternative in the knowledge economy that we are building. Education is going to be imperative for someone’s success. So we are setting up a situation where we are forcing everyone to get an education, while they are pulling back the funding. That’s a bigger discussion that needs to be had.”

DGRI touts ROI

Downtown Grand Rapids Inc. czar Kristopher Larson, who is also executive director of the Downtown Development Authority, told the DDA board last week that DGRI’s Movies in the Park this summer was a money maker.

Through surveys of people attending the free big-screen outdoor movies on the grass between the Ford Museum and the river every other Friday night, Larson’s DGRI staff deduced how much each film had “induced consumer spending” downtown.

At the “very, very low” average cost of $7,000 for putting on each of the six movie nights, or a net investment of $34,122, according to Larson, there was a total return on investment of $439,172 — $12.87 for every dollar invested.

People who came to see “Grease” spent a little more than $28 on shopping, restaurants, entertainment and transportation while downtown, according to estimates by the DGRI staff. For the Aug. 12 double-feature of “The Sandlot” and “Jurrassic Park,” it was slightly under $28, according to charts and graphs in a PowerPoint shown at the DDA. The crowd that night was estimated at 5,300.

About 50 percent of the season-long audience was from “downtown and close-in neighborhoods,” and 26 percent from “nearby suburbs within 10 miles.” An estimated 22 percent of moviegoers were from 30 or more miles away, including a father-daughter duo who came from Ludington to see “Grease,” Larson told the board.

DDA board member Jim Talen, who is a Kent County Commissioner and lives in GR, noted 50 percent of the moviegoers were from downtown or close by.

“How many of these folks would have been downtown anyway, spending money?” wondered Talen.

That prompted a discussion about the accuracy of the “intercept surveys” done by the DGRI’s Safety Ambassadors, who walk the sidewalks throughout the entertainment district on busy nights to keep an eye on things but mainly to answer questions posed by out-of-town visitors. At each movie night, there were at least 125 people answering the surveyors’ questions.

The DDA board kind of left the survey issue up in the air.

Afterward, the Business Journal asked about the cost factors to put on Movies in the Park, and learned they included portable toilets, rights to show the movies, website and communications, musicians on nights when there were live bands to entertain the throngs, security and the GR Police Department.

However, the Business Journal also learned the $34,122 investment was just the funding needed from the DDA (non-tax capture revenue), and did not include the undisclosed revenue that came from Movies in the Park’s  2014 financial sponsors, which included Celebration Cinema, GMBae, Founders Brewing Co. and Appropos.

Rivers runs through it

At the time of her death, Joan Rivers had been working with Grand Rapids-based Fubble Entertainment’s Teresa Thome and Patrick Ziegler on “Fashionista and Glamour Girl.”

The animated web series had Rivers voicing superhero Fashionista, out to save the world from making hideous fashion choices, and her by-day crotchety counterpart, department store seamstress Roxanne Bischoff.

Thome and Ziegler expressed admiration for Rivers' talents and — her niceness.

“I'm grateful that I got to know her,” Ziegler wrote on his Facebook page. “I celebrate her for the genius comic she was and her generous spirit on a personal level. I will miss working with her greatly. My heart goes out to Melissa, and her grandson Cooper, and all of her close friends and family. RIP wonderful lady.”

Recent Articles by Business Journal Staff

Editor's Picks

Comments powered by Disqus