MarketWatch recently published an article called The next 10 investment bubbles by Wallace Witkowski, and I thought this would be a nice follow-up to last week’s commentary on the Two-Term Presidential Curse, in which two terms of presidencies ended in bubbles and broke seem to end.
Bubble #1: US Equities: The US bull market is almost five years old and the S&P 500 is up 170% since its March 2009 low. The last 10% correction ended in June 2012 and the S&P is up another 40% since then… and while corrections usually reset markets, what is different this time is the environment of ultra-low interest rates and monthly stimulus of $85 billion driving the market Stock rally. Of course, solid earnings have also reassured investors, but talk of the Fed tapering off stimulus – is beginning to worry some market watchers. However, there are many, like Warren Buffett, who don’t think stocks are overvalued at current levels.
Bubble #2: Momentum Stocks: Well — there are definitely a few stocks like Tesla Motors and Facebook, to name a few, that have risen above fundamentals. Over the past year, Tesla is up about 336% and Facebook is up about 135%, with many analysts agreeing that momentum stocks like these have surged to levels well above fundamentals.
Bubble #3: Bitcoin: Some of you may have heard of Bitcoin — an alternative currency not controlled by central banks (which adds to their allure). As you would expect, many, including the underworld, like bitcoin as a countryless currency in which they can freely transact business away from state-controlled banks. Believe it or not, bitcoin prices are up almost 2,500% in 2013, with a nearly 76% surge in November alone to around $400 per bitcoin… Even internet giant Baidu (China’s Google) is planning recently started accepting bitcoins as payment for services. Several bitcoin startups have also raised significant venture capital, so something new is afoot here.
Bubble #4: Investment Grade Scotch: Wow – who would have thought Scotch whiskey would make the list… but it turns out that investors have significantly increased the price of rare whiskeys as must-have collectibles. A Scottish company that tracks whiskey auction prices says prices have risen 170% since the end of 2008, with rare scotches fetching four and five figures a bottle! Of course, high prices have prompted many distilleries to release their own limited editions, which could push up supply and lower prices… but skeptics believe prices could go even higher as newer limited editions meet the exacting standards of the Connoisseurs of a good scotch might not be satisfied.
Okay, I’m going to summarize a few categories now to save time, so here they are.
Bubble #5 & 6: Property Values in London and China: Property prices in London are on the up, with prices up 10% in October alone and set to rise further on positive UK economic data. London is seeing higher demand for homes than supply, partly due to the turmoil in the Middle East driving money into London property as a safe haven. While rising interest rates could dampen domestic demand, they are unlikely to dampen demand from foreign moneybags.
Similarly, property prices in China rose nearly 11% in October – the fastest rate of growth since June 2011 – reviving fears of a new bubble and prompting the government to cut lending and stabilize growth. A lack of confidence in China’s sluggish stock markets is also driving money into US housing, which could well boost home prices.
Bubble #7: US Farmland: Prime US farmland has seen prices jump 20% over the past year to $8,400 an acre – a sustained steep upward trend since the late 1980’s with almost no major correction. Prices are particularly high in the heartland, where corn and soybeans are thriving — with land price gains being fueled by rising commodity prices and low interest rates. However, it looks like farmland prices may avoid a collapse as commodity prices retreat from previous highs and credit availability is weakened by rising interest rates. So US farmland appears headed for a soft landing, not a crash.
Bubble #8: Cattle and Beef Futures: Cattle futures have been at an all-time high since November 1984, from just over a dollar a pound earlier in the year to $1.34 a pound. Prices have skyrocketed as farmers have trimmed their herds in recent years due to droughts and high feed costs, making livestock farming unsustainable. Now supply is lagging behind demand, but rising beef prices could slow beef consumption in favor of cheaper alternatives like chicken and pork. As feed prices fall in 2013, ranchers could start building herds and stabilizing supply and demand by the end of 2015 – so a crash is unlikely here either.
Bubble #9: Student Loan Debt: Over the past decade, federal student debt has tripled to more than $1 trillion as of June 2013, with default rates soaring since the 2007 financial crisis and new grads finding it difficult to find jobs to find. Default rates have increased from about 5% in 2007 to over 10% in 2012, and rising and even Ivy League grads are part of the growing default trend.
Bubble #10: Tech Startups, IPOs: The market for IPOs has been very bubbly lately with gains of 100% on the first day in some cases. In recent IPOs, Twitter is up 64% to $42 from its IPO price of $26, though it has yet to report a profit. Potbelly Corp., a sandwich restaurant chain, went public at $14 and is now trading at around $30, up over 100%. Emboldened by this highly receptive market, many other no-profits startups — like Chegg, which only went public on Wednesday — are also rushing into the market — raising hundreds of millions in cash and raking in billions in valuations on zero profits. It’s a bit like the go-go dot-com days, and many analysts are wary of these surprise valuations.
So there you have it – 10 potential investment bubbles… which I plan to follow through the end of Obama’s term. And while we’ve identified these ten, I wouldn’t be surprised if something completely out of the ordinary hits us and crashes the markets… only time will tell.
Steve Pomeranz is a Managing Director of United Capital Financial Advisers, LLC, “United Capital,” and owner of On The Money. On The Money is not affiliated with United Capital.
Thanks to Steven Pomeranz | #ten investment bubbles
