Forget WrestleMania. We're living in a world of "Bubblemania," where everyone is manic about getting body slammed by the U.S. stock market. A quick Google News search reveals that in the last month alone, there are over 200 articles opining about the bubble-like frothiness of stocks.
Despite all the attention, nary a soul has any clarity on the issue. Heck, the latest analysis from FactSet's John Butters does nothing but incite more confusion. Using the most common valuation metric - the price-to-earnings ratio - he says that the stock market is both overvalued and undervalued. It all depends on the timeframe we evaluate.
Newsflash: Stocks aren't the only assets prone to overinflation, followed by sudden implosions. Indeed, while everyone is preoccupied with stocks, other bubbles are inflating right under our noses. Yesterday, I profiled two such asset bubbles - investment-grade scotch and farmland. Today, it's time to share two more destined to implode. Take heed! Then tomorrow, we'll wrap up our bubble talk with a situation that's actually opening up a timely opportunity to invest. (You didn't think I could go three straight days spreading doom and gloom, did you?)
~Asset Bubble #3: Bitcoin
When it comes to buying Bitcoins, I've told investors on multiple occasions to channel their inner Ice Cube and "check yo' self before you wreck yo' self." Clearly, no one is listening. Completely undeterred, investors keep bidding up the cryptocurrency. In a mere week, prices zoomed more than 100% higher to hit an all-time high above $700. What set off the dizzying sprint?
Nothing but rampant speculation.
Remember, the currency doesn't fall under the domain of a central bank. So there was no policy change that prompted the move, as is the case with most currency market disruptions. Of course, Bitcoin backers will swear that the recent run-up points to the increasing relevance - and, ultimately, the widespread use of Bitcoins throughout the world.
I'll let venture capitalist, Paul Kedrosky, weigh in on that load of bull first with his timely tweet from November 18: "People celebrating Bitcoin price volatility as if that alone makes it a viable currency might ask why global trade isn't denominated in [Zimbabwean dollars]." (For those completely unaware, the Zimbabwean dollar faced runaway inflation, which necessitated the creation of a $100-trillion banknote. Can you imagine having a $100-trillion bill slip out of your pocket on a train?)
Now, it's TechCrunch's turn. The headline from a top story on the site says it all: "Bitcoin $645? Yeah, That's Totally Reasonable." And finally, it's my turn. If Bitcoin truly is the future of currency, we're hosed!
Bitcoin exchanges have already been hacked. Not to mention, there are already several digital currency offshoots, known as altcoins, aimed to fixed inefficiencies in the market. The future of money? Puh-lease. Bitcoin is nothing more than a modern-day version of the tulip bulb mania witnessed way back in 1637. And we all know how that ended.
~Asset Bubble #4: Real Estate (But Not Where You Think)
Although the U.S. real estate recovery is heating up, leading many pundits to warn about another bubble, there's no arguing the matter across the pond. The London property market is in full-blown bubble territory. And it's most apparent when we compare the price increases to those in New York City.
Prime Manhattan property is up 20% from its trough, yet still remains 25% below its 2007 peak, according to S&P Case-Shiller indices. Meanwhile, Greater London property prices are up 58% from the market bottom - and now trade 5% above the 2007 peak, according to the Nationwide Building Society indices. Limited supply and increasing foreign demand - thanks to a weakened currency and closer proximity to the fallout in continental Europe - explained the outperformance for a while. But not anymore.
The pound sterling has stabilized, as has the economic crisis in Europe. Now we're simply dealing with people "buying in the hope that prices keep going up, rather than any fundamentals," as the Financial Times' John Authers puts it. A year ago, independent research firm Fathom Consulting's proprietary model indicated that London property prices were rational. Today, the same model says they're 15% overvalued.
On the off chance that you own any British REITs, like Land Securities Group PLC (LAND) and British Land Co PLC (BLND), both of which trade over-the-counter in the United States, I'd consider taking profits. Or at the very least, it's time to tighten up your stops. As we learned not long ago in the United States, real estate isn't a one-trick pony. Prices don't just go up over time. They come down just as rapidly.