Is Another Bubble About To Burst?

Posted by Phil Ferguson on January 26th, 2010 – 3 Comments – Posted in Economy, Stock Market

NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you think it is OK to make investment decisions based on a blog post, then for the love of the FSM – Stop reading my blog.

Fortune has an interesting story on 4 possible bubbles.  The four areas of concern, as they see them are: Gold, Oil, Treasuries and Stocks.

Gold – I have never been a fan of “investing” in gold.  It is a commodity and has very serious price fluctuations.  However, over long periods of time gold does hold its value.    You may have heard the catch phrase, “Gold is a hedge against inflation.”   That is to say, what you could buy with an ounce of gold in 1920 you can also buy with an ounce of gold in 2000.  You will not lose ground to inflation nor will you beat inflation.  As the price goes up companies can afford to get more gold out of the ground.  We could be looking at a bad combination of people chasing “what is hot” combined with new production hitting the market.  If some investors get spooked the price could fall quite a bit.  If you really, really want to put 5% of your money in gold – I could live with that, just don’t do it after the price has doubled in just a few years.  Even better, skip gold and do some real investing.

Oil – Some of the same logic applies here.  Remember,  oil was $150 a barrel about two years ago and predictions were that it will go to $200.  Well, it went to $50.  Now oil is back to $75.  Will it go up or down from here?  Who knows?  There is this old joke about oil,  “What price does OPEC want for oil each year? $100, $100, $25, $100.”  The occasional drop in prices keeps us addicted.  This is not for the faint of heart or the rational, in my opinion.

US Treasuries – This one should worry the average investor.  If you are looking for more stability and are ok with lower returns, treasuries can be a good place to go.  However, low interest rates (current FED funds rate is 0.25%) have made it easy for banks to borrow cheap money and buy treasuries.  The high demand pushes up prices and lowers the yield (current 10 year yield is around 3.6%).  Remember, bonds are a little tricky because as the price goes up the yield goes down. When the Fed starts to raise rates, treasuries will look less attractive and the bonds you already own could take a beating.  Keep an eye on how much of your portfolio is in bonds and shy away from long bonds (ten years or longer maturities).

Stock Market – While the market made a nice return in 2009 (S & P up 26.5% for 2009) it still has a long way to go to make up for the almost 40% loss in 2008.  I don’t expect any big returns in the next few years and I think the odds of a full blown double dip are very low.  The stock market is the best place to go for long term investments (10+ years).  If you planning on adding money to the market at this time, think about putting in 10% each month over the next 10 months.

  1. Michelle says:

    I would say for the very next bubble of these four, look to gold. It is being hawked at almost religious proportions right now. Any time something is said to be a sure bet, it usually is not.
    Oil may rise a bit, but contrary to what is portrayed as popular opinion; most people realize it is a finite resource and the look towards ‘green’ industry has already started moving into the mainstream.
    U.S. Treasury, there is too much control over it right now making it difficult for me to imagine the government allowing it to get out of hand. I could be wrong, but I have more optimism with the rational approach being taken by the current administration and those he puts in office.
    Stocks, they will always fluctuate. Right now the populist attitudes and banking atrocities may help to slow down unreasonable growth that has led to these cyclical patterns of boom/bust since the market began. Much like a home’s equity, it is all pretend money until you have it in your hands.
    I would be more concerned about currency because the markets have become so international creating an environment of rapid turnovers in investments of currencies. This allows the domino effect when one economy is badly damaged because almost all other economies have an investment in it. For example, this last big mess in the U.S. and how it effected (and continues to effect) the rest of the world.
    I would really keep an eye on green technology. I would predict a push towards investments in things instead of stocks that creates an effect similar to the dot com boom/bust. There really are many different ways to tackle better energy and a great deal of money is bound to be made and lost chasing it.
    (look a blog within a blog to keep yours company)

  2. Dabizi says:

    How about China?

    Not only is there a long history on misreporting economic and financial results (the provinces have a history about lying about crop yields and taxes to the Emperor, and we know that during the Great Leap Forward the crop yields and factory production was overblown). It is an open secret there that the government in involved in stealing technology from foreign companies. If you are interested in contracting for the U.S. government having relatives in the Chinese mainland is considered to one of the biggest risks for when granting security clearances.
    The lack of intellectual property laws is a concern for anyone that is doing business in China, and the suspicion that the government was behind corporate espionage is one of the official reasons that Google is considering leaving China.

  3. Ron says:

    I am still concerned about the commercial real estate bubble, which could hurt blue chip companies and in turn hurt the economy as a whole. I’m still waiting for the credit derivative market to show it’s ugly head as well. End result, I’m still not ready to get back in.

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