Predict which bubble will blow up next…

By: ispeculatornew
Date posted: 10.20.2010 (5:00 am) | Write a Comment  (5 Comments)

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A couple of weeks ago, I wrote a post about the signs that we missed before the 2008 credit crisis blew up, namely the financial star power of Lenny Dykstra. Think about it for a few seconds… since 2000, we have been in bubble after bubble

Early 2000s: Tech Bubble
Mid 2000s: Commodities bubble (remember $150 oil that was going to $200-300?)
2008: Credit Bubble
2009: Real Estate Bubble

Why we do week getting these huge bubbles that take down the markets when they collapse? Some such as Matt Taibbi blame Goldman Sachs, but most others think that it’s because the way that our system is now being managed. We do so much to avoid tough times that we go into excesses the other way around. The 2001 Tech bubble collapse combined with the tragic events of 9/11 were a tragedy. But taking down interest rates to almost 0% in an attempt to revive the economy created a whole new set of issues that helped blow up the entire system a couple of years ago. I think it’s fair to assume that as of right now, some new bubbles are being created. The trouble is seeing which ones. As was commented in our post about Lenny Dykstra, it is much easier to see the signs after the facts. That does not mean we should not try to see them before they blow up though.

Betting on a blow up can end up being a very difficult though. Why? Because the trade can go against you for much longer and much further than you can generally assume is possible. Bubbles tend to do that. But being prepared and aware of a possible bubble is still a prudent thing to do. I would love to hear your thoughts on these or any other bubbles that you can think of.

US dollar

The US dollar is a source of debates around the world. Its value is difficult to assess because it not only has a fundamental value as a currency of the United States, but it is also the currency used for reserves around the world and for much of international trades. It is not quite clear what will happen because the strength of the dollar depends mostly on investor confidence towards the US government. We have discussed the need for diversification and part of the reason behind is because of the uncertainty regarding the government’s fiscal position. The US government has high deficits and a debt level that is not that far off from countries such as Greece.

It would not be impossible to see some start to lose confidence in the ability to repay its debt. If that were to happen, the cost of debt would move higher which would add pressure to the government. Where would it end? Difficult to say but it’s fair to assume that China and Japan have very important roles in keeping the confidence high in the US government. They do own much of the debt themselves and have many $USD denominated assets so you would think that they would have strong incentives to keep the dollar flying high. But if it did start to lose value, things could go very quickly.

Real Estate #2

Yes, I know, we did already suffer from a huge drop in real estate prices in the US and in most of the world (Canada being a lone exception). But research shows that prices may still be overvalued and they did require a lot of government help to get some more buyers into the game. As in anything, giving too many incentives usually only gives a short term stimulus. In the long run, the correction could continue. Some markets such as Florida have already lost so much that it’s difficult to see how much worse things could get. But inventories are so huge, there are just not enough buyers to fill the gap in many places right now. Also, a lot of the predator loans that were used and which make it almost impossible for the homeowners to keep paying the house are approaching reset dates that will likely force them to either sell the house or simply abandon it.

Gold

We did write a post about Gold and its anticipated rise towards $3000 but also discussed the counter arguments. Gold is a source of much debate because it’s value is mostly based on confidence and lack of confidence in the US dollar and other assets. The one thing that screams bubble is when everyone on the street or in the mall thinks that something’s value will go up. Remember when everyone was buying tech stocks that had no earnings or when everyone was buying 2-3 houses and putting them up for sale the following day at a 10% premium? A similar thing is happening with gold. Magazines, newspapers, tv shows are all advertising gold as the big thing that we should all get involved in. Just take a look at this video

Doesn’t that scare you? No matter why you are long gold, that certainly screams bubble.

China

China has generated much of the world growth in the past decade powered by its population of over 1 billion. It has been able to finance US spending, generate much of the world’s stuff. But there are many big questions regarding China. What will happen with the Yuan? How reliable are the government provided numbers? How much longer can a central government rule over such a huge economy? Many assets are overheating in China including real estate, financial assets, etc. I read that a quarter of the Chinese corporations were investing in the stock market. Why? A market that goes up almost all of the time is an easy way to increase profits.

I think you are starting to see that many things could go wrong in China and many anticipate that they will. When will it happen and how severe? That is open for speculation. But once that happens, the impact on the world economy could be devastating. You can imagine how demand for commodities would crash if China was to suffer from a severe recession which would take down natural resource countries such as Australia & Canada. The impacts would spread quickly….

Questions…

So my question to you is.. do you think that some bubbles are currently being created? If so, which ones and how are you/will you prepare for those?

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5 Comments

  1. Comment by Zavi — October 20, 2010 @ 8:48 am

    OMG!!!!!!! that’s an awesome VIDEO lol he knows his stuff 😛

    Fed chairman Bernanke brought up the possibility of additional easing in August. This, I think, will create some bubble in the near future for Gold (already… but more to come) and Stocks… What do you think about this “2nd round” of Quantitative Easing?

  2. Comment by Stephen — October 20, 2010 @ 9:53 am

    Ever since I started saving there’s been one bubble after another but I kept investing like an idiot and kept very little cash. Now I’m trying to be better prepared and keep more cash. Interest rates suck now but so be it. One of the investments that did really well for me were the bonds and I want to be in bonds more but I keep hearing bonds are the next bubble so I don’t know what to do.

  3. Comment by IS — October 22, 2010 @ 4:21 am

    @Zavi – So you are convinced by Mr T?:) 2nd round of QE will be very bullish for gold no doubt as it will decrease long term expectations for market returns and increase inflation expectations

    @Stephen – It’s a difficult environment but I think holding cash will be a good thing to profit from the opportunities.

  4. […] a way, it becomes similar to trading a bubble. Even if you are convinced that a valuation is unrealistic, it can be very difficult to keep the […]

  5. […] is the big problem of course. Like  “trading any other bubble“, irrational things can go on for much longer than we can usually expect and going short on […]

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