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Tuesday, July 23, 2024




Courtesy of The Pragmatic Capitalist

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 occurring25%.  Unfortunately, I have trouble jumping on the hyperinflation bandwagon until I see the major deflationary trends in assets, wages and debt subside.

food bubbleBubble #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 occurring100%.  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.

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