THE NEXT GREAT BUBBLE
It’s every investors 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 n 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 GW 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 Eneergy 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.
Those seem to be the bubbles of the world now. I like shorting the inflation bubble though. 9 billion seems to be population projection for the world at 2050. Regarding gold, it is NOT an inflation hedge, but I do regard it as a put option on world currencies. (It also does well when the opportunity cost of holding it is low; the return on equities will be lower in the future, and I do expect lower interest rates so it can do well in a deflationary environment.)
However, I do think energy, gold, and gold miners might become bubbles too.
Regarding emerging markets, China is still protectionist and they support “inefficient” state owned enterprises. I wonder if a wave of protectionism from Western economies would destroy their export markets in addition to the current debt deflation. I also wonder if their demographics (or natural resource shortages) would hinder their ability for internal demand driven growth. Wage arbitrage would drive down their income as capital might seek lower wage countries, preventing them from being consumers. Also, I remember Jeff Rubin talk about how higher oil prices would make it more cost effective for goods to be manufactured domestically as transportation costs would negate the advantage of lower wages.
Those seem to be potential bubbles in this deflationary environment. Many investors ask what to invest in. Invest in what? Of course, stocks are likely to tank further, and bonds have low yields (they might get even lower in my opinion.)
TPC –
Great article, the thematic investing opportunities you point out are spot on.
I’ll stick with inflation over all the others. It may be the longest wait, but IMHO it has the highest probability. The others can be played along the way, but as inflation kills everything and cap and trade and health care suck all the money out of the economy equities have no foreseeable real future here or abroad. Very nice post TPC.
The problem with investing in the next bubble is getting out before it bursts. In hindsight, it’s easy to look back at all the past bubbles and wonder how people ever thought it would continue on forever.
But when you’re in the midst of it, it’s an entirely different story. Greed takes over. You start to get worried not about losing money, but about not making as much money as you could have if you get out too early. You even stop thinking that it’s a bubble, and that this is the new paradigm.
But wait, isn’t it just amateurs who suffer from this? Doesn’t the smart money know better? Nope. Remember all the dot-com stocks valued on the “new” metrics? Or the books by David Lereah (of NAR) that real estate will never go down?
For this reason, I would never recommend trying to catch the next bubble. You’re more likely to lose money than make money. And in most cases, you would have been better off with your money in an index fund, or a bond fund, or maybe even the bank (assuming it doesn’t fail).
Matt Taibbi postulates carbon trading (cap and trade) as the next great bubble, mainly it seems because Goldman Sachs is pushing for it. Perhaps he’s right. Certainly, the more hardcore environmentalists think that the cap and trade bill doesn’t actually do anything positive for the environment. Could it be that the real end result of the bill will be to enable a new trading environment, which will form a bubble under the kindly guidance of Goldman?
It seems that another candidate for the next bubble may be carbon credits. As GS is all over the launch of this market and it aligns perfectly with the dems/Obama mission to save the world.
I like the food issue as well.
TPC,
I also see access to clean water being very important in the next 20 years. Desalinazation technologies would be key. Already the Chinese have tried to load up tankers with WATER from the Great Lakes but were denied access in doing so. What does that tell you?
TPC,
Also, and sorry to monopolize your board here, but I see small arms suppliers doing very well too. Military grade. Gonna be a lot of hot spots due to turmoil around the world.
Nice comments everyone. Prescient, water is a huge problem in China. You might want to look into DGW, VE and INSU.
TPC,
I like VE, though a bit expensive at the moment.
Stop with the global warming nonsense, already. It’s ruining your credibility with the thinking public.
good stuff TPC, will be linking in my linkfest.
I’d agree that water could potentially be a big problem, but the desalination plays right now seem to be a function of higher energy prices. I did a lot of work on ERII a while ago (built a model, etc) and it just wasn’t a grand slam by any means. Obviously, the story will take more time to play out and the severity of the issue will need to increase. But, for the most part, I’ve found desal plays to correlate to energy prices. As of right now, the most desal would be in the middle east, etc. China obviously has big water problems too. Just a matter of finding out the best way to play it. Concept is always one thing (macro level) and execution is another (investment vehicle).
Good stuff Jay. Thanks for stopping by!
if you believe in hyperinflation (and i don’t), you should be long real estate and leveraged as much as possible.
why is it that the hyperinflationistas don’t bring up nominal debt as the best inflation hedge?
Might want to think about water infrastructure stocks. No matter the economy, the government will always have to invest in water infrastructure to sustain society.
Desal isn’t necessarily th emost significant way to play water though. As Darial points out, water infrastructure are an alternative as are water purification plays. Companies like Veolia and Watts Water Technologies generally don’t need to wait for the desalination play to work its way out as they are in demand now.
The bubble and bust economy is due to the rental value of land being privatized and treated as a commodity. All these financial bubbles originate from the illusion one man can deny other men the right to exist on this earth because of a title. This becomes economically dangerous when all the land is titled or legally owned.
Once the land is bottled up there is an enormous pressure driving wages down creating a perpetual landless class. This is the beginning of a welfare state. The Progressive era started when land in the USA became legally owned, around the 1880s.
Usually there is a migration associated with it unless the destinations are more bottled up. In the past Europe sent migrants to the USA, now Mexico and others partake. The USA was a relief valve but not anymore. The welfare state spawned Frannie, Freddie, among other entitlements and expenses to keep the landless satisfied. We are now like Europe.
Secondly,treating the rental value land as a commodity brings on speculative investing about every 18 years. What happens is the value of land increases which draws more cash out of the economy into a nonproductive investment, land speculation. After a while the real productive economy is starved for cash and then the fed starts manipulating the economy. There are different scenarios but in the end a crises results.
Most analysis deals with the various symptoms like the Fed, Treasury, Fannie, the SEC, the bankers, etc. but never finds the origination of all these financial bubbles.
The solution would be to share the rental value of land by shifting property taxes off improvements to land value. This would evaporate the demand to speculate in land. Keep in mind land values are directly related to community funding such as roads, bridges, police, sewage, utilities, etc. The Landlords do not increase the value of their property so taxing it is much better then taxing the productive economy as we now do.
You forget a big one :
greenhouse gas emissions bubble.
see : http://www.chicagoclimatex.com
While I agree that the food bubble has a high probability of occurring, it’s certainly not 100%. With increasing populations, there’s also a higher probability of diseases being spread on a pandemic scale (including those we haven’t heard of yet). If something happens that wipes out 75% of the world’s population, then you won’t have a food shortage, clean water would be more abundant, and global warming would subside (until the population begins to increase again).
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