6 Ideas For Where The Next Bubble Will Be

by: Simit Patel

The US Federal Reserve recently announced their desire to keep interest rates low until 2014. Meanwhile, money supply continues to increase, with reported MZM increasing by 0.2% during the month of January.

As those familiar with the basics of Austrian economics can attest, an increase in the supply of money and credit typically has one of two possibilities:

1. Asset bubbles in whatever sector(s) the new money and credit find their way into
2. Hyperinflation, if the expansion results in price inflation and causes a panic exodus out of the currency

In the case of the United States, hyperinflation is a distinct possibility, and one I am confident we are inching closer towards. This subject has been beaten to death on the Internet for years now, so I will not bore you with the basic argument (here's a good summary, for those interested). The simple insurance policy is to have some physical gold on hand in the event of a complete hyperinflationary breakdown.

But as 40+ years of fiat monetary policy and 20+ years since reckless monetary policy under Greenspan and Bernanke illustrate, the U.S. economy is robust and will not go down easily. And so, there is still the possibility that the Fed's radical inflationary policies will not break the dollar, but rather kick the can down the road one more time and unleash one more bubble before the bill for 40+ years of monetary madness is finally due.

And so, from that perspective, what sectors are most likely to be the recipient of a bubble? Here are a few ideas:

Gold Mining Stocks. Without question, miners are my favorite candidate here. Gold has already rallied and has gotten the attention of the public (although the public still has not stepped in). It is a simple concept to understand. The fundamentals behind miners are increasingly favorable so long as gold prices stay above $1650, so there is that kernel of truth that could lead to an epic bubble. This sector can be easily played via a series of ETFs: (NYSEARCA:GDX), (NYSEARCA:GDXJ), (GLDX), (NYSEARCA:GGGG)

Uranium. Uranium is off to a very hot start in 2012, as I've previously noted. The fundamentals for uranium are outstanding, and with the US approval of the first new nuclear reactors since 1978, the dream of a "nuclear renaissance" is becoming closer to reality. Those interested in capping carbon emissions, an increasingly popular idea for better or worse these days, will also find nuclear to be a promising opportunity. Fukushima does leave a negative emotional sentiment, though I think this can be overcome as the market becomes more educated regarding the risk/reward of uranium-powered nuclear energy and as the planned reactors increasingly come to production.

For those interested in a bubble, a larger concern is that uranium did go parabolic in 2007, along with a number of other commodities. So, some may argue it is unlikely for another bubble to emerge so quickly thereafter. I agree, and this is one of the primary reasons why I favor gold mining stocks as the leading candidate for the next bubble over uranium, but I think it is important to note that the bubble in 2007 was much smaller in terms of how much mass participation it received. It did not get the mass attention that the housing bubble or the first dot com bubble got. So, I think the odds are greater this time around, especially with the advent of a uranium ETF (NYSEARCA:URA) and a nuclear power ETF (NASDAQ:NUCL) that makes investing in this sector very user-friendly.

Oil and Gas Pipelines. Fracking is creating an energy revolution in the United States, and is positioning the world for an abundance of natural gas -- if only this gas can be moved. The fundamentals are in place for bullishness in the energy infrastructure sector, as I previously noted, and as fracking increasingly is seen as an uplifting story of job creation and as the infrastructure problem is understood as an obstacle to further growth, I think selling this opportunity will be much easier and thus the excess money and credit could find its way here. Kinder Morgan (NYSE:KMP) is a company moving aggressively in this space.

Rare Earths. The story with rare earths (REEs) is largely the same as uranium, in the sense that there is a significant supply/demand imbalance that suggests higher prices. China owns 97% of current production of rare earths, so there is possibility to use nationalism and independence from exports as an emotional tool to draw capital in. As is the case with uranium, though, rare earths went through a recent bubble -- and even more recently than uranium, as rare earths saw their heyday from 2009 - 2011. Molycorp (MCP), operator of the only active rare earths mine in the United States, saw 5.5X appreciation from its IPO in July 2010 to its peak in April of 2011. The recency of this bubble does make it a less worthy candidate to be a bubble again, but with the Fed's aggressiveness here, I think it is still a candidate in the running. I've bought some shares in Quest Rare Minerals (NYSEMKT:QRM) largely as a speculation on this concept.

China. The China meme has been beaten to death over the past few years, though I still think it is worth noting because of the fundamental situation. China is producing more than it consumes and is investing aggressively in building cities, acquiring farmland, buying up land for resource production, and establishing deals to import such resources (like the recent China-Canada uranium deal). Geopolitical tensions make me a bit wary of this opportunity, though, so it's not one I'll be playing directly, although I do like investing in companies with operations I find promising and in China, like Silvercorp Metals (NYSE:SVM). For those looking for a broad ETF to invest in in anticipation of the Fed blowing a bubble in Chinese assets, (NYSEARCA:FXI) may be worth considering.

Internet Stocks. It's the late 90s all over again! With Facebook, Zynga, LinkedIn already IPO'd, and more enjoying billion dollar valuations while still private, the case for a potential bubble cannot be denied. Personally, I won't be going anywhere near this, because the fundamentals do not justify these valuations in the least, in my opinion -- and so I think this is already a bubble that could collapse at any moment. For those who are still bullish on the Internet and want to invest in it, I think Asia is where to look for the undervalued opportunities. An Indian dot com did have a funding at a billion dollar valuation last year, which I think is closer to the opportunity worth investing in. But still, I think investors are better off passing on this opportunity, or playing it via active trading if they are so inclined and capable of doing so. Facebook is of course the mothership leading Bubble 2.0, though the social media ETF (NASDAQ:SOCL) is a vehicle that will interest those in interested in this space.

In conclusion, I think the Fed's policy stance makes it increasingly likely natural bull markets will be turned into bubbles. Bubbles are problematic for an economy and distort the market's ability to discover prices, but they can create outstanding profit opportunities for those paying attention. Just remember that when the mainstream media frenzy kicks in and price acceleration goes parabolic, it's time to get off before it all comes crashing down.

Disclosure: I am long GDX, GDXJ, GLDX, GGGG, SVM, QRM.