Predicting the Next Great Bubble 38 comments
-
Font Size:
-
Print
- TweetThis
It's every investor's dream - you buy into an investment theme or idea before anyone else has caught onto it and you ride it all the way up until it gets bubbly and you sell to some sucker who buys at the very top. Didn't you wish you owned oil all last summer? Or Amazon.com in 1999? Or a house in 2006?
Well, it's not exactly reasonable to expect that you'll buy into a bubble before anyone else, or for that matter, that you'll sell at the peak, but that doesn't mean we can't dream... and maybe even catch some of the ride in between the bottom and the top. Regular readers know I would never expect you to put all your eggs in one basket so let's look at a couple different scenarios and spot the next big bubble:
Bubble #1 - The Inflation Bubble
"By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." J.M. Keynes
The cause and the timeframe - The Fed hasn't learned their lesson. Despite 25 years of printing money and trying to inflate our way out of every crisis the Fed is at it again. The Fed has expanded their balance sheet at a rate that is unheard of. They've also vowed to keep rates low as long as necessary to reflate the market. While I don't currently see any risk of inflation in the coming 6-9 months there is a very real potential that inflation gets out of hand in the next 5 years.
How to play it - Inflation destroys the paper money is printed on. If you believe hyperinflation is the next great bubble (as Marc Faber does) you will want to be short U.S. dollars and long gold and silver. Owning a good gun wouldn't hurt either.
Probability of occurring - 25%. Unfortunately, I have trouble jumping on the hyperinflation bandwagon until I see the major deflationary trends in assets, wages and debt subside.
Bubble #2 - The Food Bubble
"For 50 or 60 years, we have let ourselves believe that as long as we have money we will have food. That is a mistake. If we continue our offenses against the land and the labor by which we are fed, the food supply will decline, and we will have a problem far more complex than the failure of our paper economy. The government will bring forth no food by providing hundreds of billons of dollars to the agribusiness corporations." - Wendell Barry
The cause and the timeframe - A number of important trends are coming to fruition that make the likelihood of a food bubble greater and greater. Exploding global populations, lack of clean water and global warming are all occurring on a mass scale that leads to food shortages. Global warming is becoming an increasing concern in the last 20 years. The warmest 3 years on record (since 1880) have all occurred in the last 10 years. Exceptionally warm weather, obviously, is not ideal for crop production. Another concern is clean water. Agriculture is incredibly water intensive. The growing lack of clean water is creating substantial lag times in production and reducing the supply of crops. Lastly, the global population is estimated to jump as much as 50% to over 12 billion people over the next 50-75 years. These three trends will combine to put incredible stresses on food prices over the coming 25 years.
How to play it - Buy agriculture stocks and farmland. As Jim Rogers often notes, the bankers of tomorrow will be today's farmers. Expect the value of farmland and agriculture related stocks to experience substantial price accelerations if a food bubble occurs. Investing in a gun rack for your tractor might be a good idea as well.
Probability of occurring -100%. Unfortunately, you could be waiting a long time for this one to come to fruition. The trends at work here are long-term in nature and could literally take 50 years to create major problems.
Bubble #3 - The Emerging Market Bubble
"Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception." - George Soros
The cause and the timeframe - Over the coming 10 years we are likely to see greater and greater capital flows into emerging market economies. Stable (manipulated) currencies, high growth potential and (increasingly) capital friendly government's are making many emerging market economies more and more attractive. Meanwhile, U.S. and European growth appear to be maturing. Making matters worse in the U.S. is the current reserve currency status debate and the attempted destruction of our own currency via the printing press. These factors all combine to make the U.S. and Europe less and less competitive in the battle for global investment dollars.
Analysts at Citigroup believe we could be in the midst of a forming emerging market bubble. Robert Buckland of Citi notes:
Over the last four months we have seen large outflows from traditional safe havens including money market funds. Much of this money has flowed into riskier credit and equity funds. Within equities the biggest flows are going into Emerging Markets. So far this year inflows to Emerging Market equity funds have returned more than half of the outflows we saw in 2008.
While flows have been strong we think that bubble talk is premature. However, the combination of sound macro fundamentals in Emerging Markets, a relatively attractive corporate earnings outlook and, most importantly, abundant easy money suggests we have the ingredients for a potential bubble.
How to play it - Buy emerging market stocks.
Probability of occurring - 50%. Depends on your timeframe. I don't see a broad global recovery occurring in the next few years, but the potential for another economic boom in emerging markets over the coming 10 years is very high in my opinion.
Bubble #4 - The Alternative Energy Bubble
"The best investment on earth is earth." - Louis Glickman
The cause and the timeframe - There's no doubt that one of the great goals of the Obama administration is to reduce America's foreign dependence on oil. Combined with the entire world's desire to reduce global pollution and the ever declining oil supplies and you have a scenario ripe for an alternative energy bubble. The Obama administration will surely attempt to pass multiple alt-energy friendly bills in the coming 4 years and given 8 years we will likely be looking at an alternative energy bubble that pales in comparison compared to G.W. Bush's oil bubble.
How to play it - Buy solar stocks, wind energy and other alternative energy related stocks. A fund such as the WilderHill Clean Energy Fund (PBW) might be worth looking into.
Probability of occurring - 30%. Unfortunately for the alternative energy bubbleheads, oil is likely to remain the most competitive and viable energy source for years to come.
If you're a bubblehead looking for some spectacular returns in the coming years, I will recommend what I generally do: diversification. A well diversified investor with a long time horizon should likely own all of the above sectors and industries regardless of your love of bubbles.
Disclosure: No positions.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 38 comments:
We are all trained, as MBAs, to ride a profit margin to it's point of maximum profit (and then bail out). Economists call it, the point of equilibrium where Price = Maximum P.
I did own a house in 2006--several of them. I had one for sale in 2005. The "peak" isn't so easy to see and I still own the houses. I guess I'll wait for the next peak.
If you are going to make the "global warming" play, you are (pun intended) going to get burned, especially since the planet is cooling. But don't worry. In a few years it probably will start warming again. The sensible intellectual doesn't use "global warming anymore, he uses "climate change." Climate change covers everything and you can have your power grab without having to measure anything.
Farmers have been complaining about their lot in life for my whole life--and they run to the government for subsidies. By the author's prediction, they will become as rich as Kings even if they continue to complain and demand subsidies by the government.
I distrust most investment advice that involves "buying a good gun." If that advice is true, then you would be better to "buy men with good guns."
In any case inflation will not, can not happen, this year or maybe next.
You must have a viable economy for inflation to happen. You need housing to get out of ER---mortage applications were way down meaning more life support for housing. Prices for homes is still dropping. Sales down most everywhere. Banks still need help. When housing prices rise in Vegas please post. No more bloody charts with money supply please. It is meaningless and your guess only.
Those predicting inflation point to the massive expansion of money and credit.
Those skeptical about inflation point to the fact that in assets like real estate, demand far outstrips supply and will for the forseeable future.
So who's right? Both, I believe. Money supply growth will fuel inflation in some assets. For other asset types, a glut of supply relative to demand will preclude price increases.
Precious metals will go way up, same with other commodities like oil and agricultural products. On the other hand, real estate is going nowhere for at least the next 3-5 years.
Here are the true current bubbles: 1) the Deflation Bubble - people are worried about a non-existent threat dreamed up by Wall Street and the Treasury to sell US Treasuries.
2) US Treasury market bubble 3) US Dollar bubble 4) US stock market bubble, particularly in financial and tech stocks (Google,Apple and other CNBC faves).
The facts are we have become much warmer so much that the snowpack, glaciers are disappearing thus soon all the farmland fed by these will become close to worthless. Nor is this day far off, within 10 yrs. So investing in them is not a good moneymaker.
Next on Alt energy bubble, oil will do well until about 2020 when it will drop because alt energy is far cheaper thus once wide spread, will hold oil, coal, nuke prices down.
Don't be snookered by those who say AE is too expensive as one can for $2k in materials built enough RE equipment for a lifetime of fairly free energy. Once in mass production these will cost only about 3x's parts costs because of competition. Now it's like 20-30x's cost so a long way to fall.
Examples are a wind generator/inverter can be built with a good profit now for about $2k/kw. A solar thermal, CSP unit could be built for $3k/kw and not only supply electricity but hot water, heat too and can burn any fuel if the sun doesn't shine.
For an eff home and EV a 3kw CSP unit and a 1kw wind gen can supply all the power needed for a 1500sq' home, EV fuel and even get a check back from the utility if done well..
As the baseline everything will have to go by these will keep energy costs down once widely spread in about 10 yrs.
And why they will be is oil will hit $4-5/gal once the economy recovers because we hit peak oil last July. This will force both people and business to go the Alt energy route as they can't afford not to. Also as oil goes up as it must, Alt energy price is dropping fast. Already in many places CSP and wind beat coal in price.
Nor would I invest in Nuke as it's cost is too high as presently used. Now if anyone starts to make smaller nukes like gas cooled pebble bed types, invest in them. But like all fueled units, the fuel price is going up.
River/tidal power is going to be big as their costs are very low, 1/2 that of coal if the engineers ever learn how to do it. I've done it on a small scale for decades but engineers just don't understand the forces, underwater environment they face but eventually will.
Probably the best investments will be in things like copper, silver, insulation, new well financed EV companies like Tesla, BYD and anything that makes lower cost AE equipment of products that cut energy use. But be very careful as many of these are not going to make it.
Probably the best investment is in AE equipment and selling the electric output for decades of profit. For instance many smaller wind turbines are being taken down, replaced by bigger units that can be had for scrape prices. At those prices could pay their costs back for installation in 2 yrs and big profits for decades after that.
And AE equipment will always beat inflation because their output price will rise with inflation. Good luck!!
Long Solar...
Large areas used to grow corn can be replaced with green waste ethenol with a six times higher yield.Switch grass is also there for the taking.
Ethanol and selected drilling can bridge our needs until alternative power is in the realm of price affordability for Americans.
Quit feeding large agriculture to grow what we do not need.
On Jul 01 08:59 AM TripleG wrote:
> I'd have to disagree with most of this article and especially George
> Soros. Bubbles are real. They have happened and will continue to
> happen because they are built into the DNA of the capitalist infrastructure.
>
> We are all trained, as MBAs, to ride a profit margin to it's point
> of maximum profit (and then bail out). Economists call it, the point
> of equilibrium where Price = Maximum P.
Bubbles are very illusive and hard to detect until they pop. The next bubble is not going to be something talked about in this article which are all conventional wisdom. It's going to be something with a very compelling argument to buy into where the risk is hidden to everyone except the deep diggers.
The Internet was the next revolution back in the late 90s, but it just got too far ahead of itself. The burst started when a telecom company went bankrupt and its built-out infrastructure sold for a lot less than thought. Then suddenly the venture capitalists and banks realized the collateral for their loans to these companies was too small, and the money dried up. Note how the reality was deeply hidden until the bubble burst.
The housing bubble was predicted by the deep diggers starting back in 2003. But, because they were years too early, their message became boring with a sense of “crying wolf”. I remember these reports on CNBC and Bloomberg back in 2005. I was telling friends and family to not buy property and sell any property they did not need. But, there was such a strong sense that “If I don’t buy now, I’ll be left out of the market” that some of those people bought anyhow extending the bubble. Note that though I saw the bubble coming because I was very well informed, I never saw how disastrous the housing crash would be. If I had any clue, I would have been much more forceful with the people I talked to.
My advice for bubbles is to stay well informed, work to avoid getting hurt by bubbles, and not try to ride them up or down. Even if you are right about a bubble, you may be too late or way too early.
It seems to me that what might be bad for the farmers in the southern U.S. should be great for the vast farms and ranches in Canada.
If you don't want to lose everything, then part of your capital can go into bubble speculation.
However, to refer to the tops of these trends and markets as bubbles is wrong. Bubbes are artificially created, pushing extreme tops that can only fall because they are not real. Bubbles bursting are not caused by trends reversing or being replaced. Bubbles are the Greensapn housing bubble or the tech bubble, where reality went out the window, and so they burst when reality set in again. Buying into bubbles is a sure way to lose, but following real trends can be very profitable.
Of course these are long-term trends. Every bubble that has ever occurred happens because of some long-term trend that results in a blow-off top. The housing bubble was the result of the long-term trend of low interest rates and easy credit. The Nasdaq bubble was the result of the long-term trend in technological innovation.
As for the speculative nature of the article - of course it's speculative. I am writing about bubbles for heaven's sake. Nowhere do I say it is prudent to put all your eggs in one basket or that investing in these ideas with you hard earned cash is a great idea. In fact, I say specifically that diversification is the name of the game if you're aiming for some bubble action.
That should clarify most people's concerns. Thanks for reading.
On Jul 01 09:29 AM stocknerd wrote:
> The inflation bubble is so....so....predicted now that it can't happen.
>
> In any case inflation will not, can not happen, this year or maybe
> next.
> You must have a viable economy for inflation to happen. You need
> housing to get out of ER---mortage applications were way down meaning
> more life support for housing. Prices for homes is still dropping.
> Sales down most everywhere. Banks still need help. When housing
> prices rise in Vegas please post. No more bloody charts with money
> supply please. It is meaningless and your guess only.
Shorting had virtually nothing to do with the market meltdown. It was primarily the fraud and misrepresentation of the major Wall Street players relative to mortgages, debt, ratings, off-balance sheet items, derivatives, etc. Combine that with a Wall Street compensation and bonus system that hughly rewarded fraud and misrepresentation, and then you are looking at the real underlying reasons for the market meltdown.
On Jul 01 03:53 PM Gtarras wrote:
> the current bubble we live through is the short trade. especially
> pronounced in debt market with the recent invention of a CDS product,
> which allows to capture not 100% return, but an unlimited one. the
> short trade bubble blowers succeeded in destroying Lehman, bear etc,
> put the whole economy in jeopardy via the destabilization of the
> financial system, and are trying to capitalize on fear even further.
> By my assessment, majority of people on SA are bearish. WHY? Most
> likely they have some sort of a short position in the market. And
> lets face it, the SA audience are the top earners, and collectively
> do influences the markets.
The money part of your comment is "as long as there is irrigation water available". From what I've been reading/hearing, that's coming increasingly into doubt.
On Jul 01 10:10 AM Valley Boy wrote:
> There is no rational reason to worry about agriculture if the weather
> turns warmer so long as there is irrigation water available. The
> Gila River Valley in the Yuma area and the Nile River Delta downriver
> from Cairo provide two successful examples of hot weather agriculture.
First, "maximum price" is not necessarily the equilbrium price. Short supply and/or excess demand relative to it can push the price up and make it greater than the equilibrium price in the short-run.
Second, the term "maximum price" is misleading as you are not necessarily maximizing profit. If there is any variation in agents' willingness to pay, you can just sell to that/those agent(s) and earn said price without optimizing your profit function. The highest profit margin might also not exist at equilibrium (Ex. a market that is not perfectly competitive).
On Jul 01 08:59 AM TripleG wrote:
> I'd have to disagree with most of this article and especially George
> Soros. Bubbles are real. They have happened and will continue to
> happen because they are built into the DNA of the capitalist infrastructure.
>
> We are all trained, as MBAs, to ride a profit margin to it's point
> of maximum profit (and then bail out). Economists call it, the point
> of equilibrium where Price = Maximum P.
I like the author's definition of bubbles - except for the inflation bubble. you can have a PME bubble, but you can't have an inflation bubble.
very entertaining article !
"buy a gun", "buy a gun rack for your tractor"
Only stupid Americans would think like that, which is not thinking at all.
On Jul 02 01:38 AM Old Trader wrote:
> Valley Boy,
>
> The money part of your comment is "as long as there is irrigation
> water available". From what I've been reading/hearing, that's coming
> increasingly into doubt.
The Bubble Bubble
I think another bubble (I hope) is Canada. It has plenty of natural resources, land (food bubble any one), water and global warming should help with longer growing season - plus a stable government etc.
Every article on SA doesn't have to be about the end of the friggin world....Anyhow, I hope some people enjoyed it and I hope everyone has a great holiday weekend. If you'd like to get back to being bearish and my usual talk about deflation, deleveraging and how horrible the recovery will be you can find me at my site (pragcap.com) - until then try not to flame me for writing something entertaining and mildly bullish....
The warmest years this century were in the 30's. We've been cooling for 10 years. Also, even though human released carbon dioxide doesn't cause global warming (because you can't pull any more heat out of the sun at a specific wavelength than it's already giving), it is a plant FERTILIZER. Trees grow 12% faster now than they did 100 years ago. Also, in case you didn't realize, warm weather is good for growing crops, cold weather causes crop failures. Therefore fear global cooling, not global warming.
Mini bubbles happen every day with individual stocks - it's called a blow off top. All you momentum players are riding the bubble selling to "the greater fool." It happens a lot with biotech companies finding "cancer cures", junior gold mining companies or oil wildcatters with a potential big strike, or internet companies with the next killer ap. Don't fear the bubble, ride it up with sell stops. It was soooo nice to ride QCOM to a 10 bagger 10 years ago.
1. Private higher education. The high school graduate population will now decline for a few years, there will be some hard thinking about the wisdom of going $200K into debt to get a degree that doesn't translate into tens of thousands of dollars of difference in the job market, endowments have suffered, and government support could wane. This could translate into excess professors and excess administrators as fewer students can afford big tuitions;
2. School administrators. The wisdom of paying $200K for a school Superintendant when state education budgets are being slashed could be called into question;
3. Oil. While this will go up again- probably over $100 again- once economic growth threatens to overcome capacity, as alternatives become clearer the risk that there won't be sufficient energy to fuel what will be slow growth will subside, and my guess is oil will drop back to $60-80;
4. The US dollar. As global development continues and monetary policy stays eased as reflation remains difficult to achieve, at some point the dollar will start to weaken again. But given that purchasing power (the amount of goods and services that an average earner can obtain based on hours worked) has improved by 2X over the last 30 years while the dollar weakened, that's not necessarily disasterous.
Many of the topics he speaks about are theoretical reactions of real world situations that either decrease supply or increase demand. Thus, the terminology bubble is an incorrect definition.
If you talk about previous bubbles you can say the Greenspan real estate bubble collapsed (proving it was a speculative bubble despite its naysayers) and was promptly replaced by a Bernake Paulson Long Term US Treasury bond bubble that collapsed (even though they like not to speak about the dollar's decline on the back of huge Long Term Treasury losses in a matter of months).
So where is the next bubble? I'll let you know when the US Treasury bond bubble stops deflationg and pushing tons of cash into commodities and US equities. If it goes too far it will cause inflation negating commodity price gains and possibly even stock gains in worthy sectors which will justify the price increase keeping them from being a true bubble. The point I'm bringing up is it's not a bubble if it is not speculative and is economically justified.
funny!
arabianmoney.net/2009/.../