What's The Next Bubble?

While the housing bubble has imploded, there may be other bubbles that haven't yet been hit by the economic downturn of the past few years. While these bubbles have held up fairly well so far, what happens if poor economic conditions continue or get even worse?

The U.S. economy is currently being propped up by annual deficits of about $1.1 trillion, almost 10% of reported GDP. That represents a substantial portion of total government spending, and is being used to cover expenses ranging from national defense to Social Security. What would happen if lending to the U.S. government stopped because the U.S. was no longer viewed as a viable credit risk? What would happen if the Federal Reserve could no longer print money (quantitative easing) because of rampant inflation or a crashing dollar?

There is a variety of scenarios that could cause other bubbles to burst, some in a very big way. Here are a few that may be sitting ducks. (Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability. See 5 Steps Of A Bubble.)

Commercial Real Estate (CRE)
CRE will face multiple challenges this year including new rules adopted under the Wall Street Reform and Protection Act. A new accounting standard for leases is also under consideration that would affect the refinancing process. These issues, along with higher interest rates, could exacerbate existing market conditions and high valuations in many markets.

Since CRE relies heavily on consumer demand, the demand for CRE is directly impacted by unemployment and prevailing wages. Service sector industries and businesses are particularly sensitive to changes in disposable income. Consumer Reports publishes a monthly index that measures overall sentiment as a function of five factors: Retail Index, Employment Index, Trouble Tracker Index, Stress Index and Sentiment Index. The August reading was down 5.1 to a 20-month low of 43.4. That's the biggest drop for one month in the last two years. (more)