Catching the Next Bubble

Includes: DIA, PBW, QQQ, SPY
by: Investing The Middle Way

The February edition of the Harper's Magazine featured an article by Eric Janszen titled "The next bubble: Priming the markets for tomorrow's big crash." Eric Janszen, a venture capitalist, is also the proprietor of, a site originally devoted to chronicling the tech bubble, but has since been focusing on the one in housing. For those interested in longer term investment trends, this article is a must-read.

The gist of the article is best summed up by the chart below where Janszen plotted the (actual and predicted) trajectories of the bubbles of past, present and future, namely the tech bubble, the housing bubble and the coming bubble in alternative energy and infrastructure.

A picture is worth a thousand words, and this chart contains a lot of information:

  • First of all, Janszen defines various stages within a bubble: normal, formation, hyperinflation, dissipation and overshoot. It doesn't offer any particular insight but lays a common framework for analyzing all bubbles.
  • One major prediction of this article is the course of the current housing bubble, which is forecast to reach the overshoot stage in 2011-12.
  • Janszen's next bubble - alternative energy and infrastructure is currently in the formation stage and bound to reach its hyperinflation stage in 2011-2013.
  • From a big picture perspective, how the current and any future bubbles pan out is obviously of the highest importance. In my personal situation, my wife and I don't currently own a home, and I'm looking at 2009 as a time that we might start looking for a house. This is earlier than the trough in Janszen's chart, because I expect a lot of real depreciation in housing to come from inflation rather than nominal price decline in the later years.

    I'm also a believer in the alternative energy space, which is the main reason behind my recent purchase of PowerShares Clean Energy ETF (NYSEARCA:PBW). I am however wondering why there isn't a commodity bubble prior, say peaking in 2011-2012. After all, what better justification for alternative energy than high conventional energy prices?

    In the inflation/deflation debate, Janszen is squarely in the former, so he's unlikely to argue for lower e.g. oil/gas prices based on waning global demand. The most plausible explanation is that the commodity bubble will be concurrent to the one in alternative energy. We know that Silicon Valley VCs have gone "green" in a big way. Janszen being a venture capitalist himself, is probably more conscientious of it.

    I would like to hear your reviews of this article, since I believe bubbles are of the uttermost importance. In fact, I'll go so far as to say that successful investing consists essentially of catching a bubble at its formation stage and not jumping ship too early or too late. So for now, I'm planning to do some reading on business relating to all manners of alternative energy as well as recycling.