Seeking Alpha
Profile| Send Message|
( followers)  
I recently published an article highlighting some risks in the iron ore market which are being ignored by some investors. In this article, I will compare the current iron ore price movements against some of the more recent asset bubbles we have seen. Despite these bubbles not being closely linked, I believe this kind of a comparison will help investors put the iron ore rally in perspective.
In my analysis I have used the U.S. tech bubble, the Japanese stock market bubble and the U.S. property bubble as examples.
For the purpose of comparison I have compared each bubble with the current iron ore market.
1. Tech Bubble vs. the Iron Ore Price
Chart 1: Iron ore bubble just falling behind the tech bubble

(Click to enlarge)

2. Japanese stock market vs the iron ore prices

Chart 2: Iron Ore has already rallied more than Nikkei in 1980s


(Click to enlarge)

3. US property market vs the iron ore prices

Chart 3: Iron Ore has already rallied more than U.S. property


(Click to enlarge)

Comparison of Performance

As per the table below, the three main asset bubbles we experienced in recent history ran for 3.2 years on average and produced an annualised return of 44% until the bubble busted on average.

Iron ore prices have been rallying for the last 2.3 years and have produced a much higher annualised return until now.

Table 1: Iron ore returns compared to other more recent bubbles

Start

Duration (Yr)

Return over the period (%)

Ann. return (%)

Tech

1/04/1997

3.0

425%

74%

Japan

6/01/1986

4.0

197%

31%

US housing

31/12/2003

2.6

37%

13%

Average

3.2

220%

44%

Iron Ore

31/10/2008

2.3

213%

65%

Conclusion:

The steeper and the longer the rally lasts the longer the underperformance is going to be. Looking at the average time period a recent asset bubble lasted, it doesn’t look like iron ore bubble has much more leg left in it.

In my next article I will highlight some key catalysts that can pop this bubble.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Iron Ore and Other Asset Bubbles