Searching For The Next Bubble: Stocks, Currencies, Bonds & Commodities
The funny thing about bubbles is that everyone recognizes them in hindsight but at the time, most people fail to heed the warning signs.
When you think about how easy it was for people to get mortgages pre-2008, it seems ludicrous. When you think about the crazy valuations of Internet stocks during the Dot-com bubble, it's almost incomprehensible. The real truth is that only a rare few are able to spot the warning signs, and an even rarer few actually act on those suspicions.
You see, the biggest bubbles tend to go on for much longer than anyone ever imagines.
So, what is happening in the world today?
Right now, the S&P 500 is on track for it's best quarterly winning streak since the 1990s. The index is up over 200% since March 2009 and takeover activity has surged. On a yearly basis, we've now had six up years in a row, and according to the Shiller CAPE ratio, the market is overvalued to the tune of 64%.
However, bubble territory we are not. With interest rates at record lows and many individual investors still on the sidelines, the market may be expensive now, but it's not yet a bubble.
In recent times, we have seen plenty of currencies collapse but not so many bubbles. We've seen the Ruble disintegrate, the Swiss franc fall from grace, and the Japanese yen slowly erode.
Legendary investor, Jim Rogers, is most bullish on the US dollar which has hit new highs across the board and seen its fastest price appreciation in 40 years. Even though he's long, Rogers thinks the possibility of a bubble in the US dollar is very real.
If markets were to experience turbulence, traders are likely to head to the greenback for safety. Together with interest rate tightening, that could see the currency make unprecedented gains.
Of all the markets worth making a case for being a bubble, commodities might be lowest on the list. The sector has consistently been one of the worst performers over the last 10 years, consistently coming in behind the performance of stocks and bonds. Not since gold in 2011 has there been a major case for a bubble in commodities.
With interest rates at record lows around the world, it's not surprising that bond investors have done so well over the past few years. In fact, bonds have been going up for almost 40 years now.
According to Barrons, the value of negative-yielding Japanese and European government bonds has risen to over $3 trillion. And this is in a time when the BOJ and ECB have taken aggressive steps (in the form of QE) to bring inflation back to the markets.
As the Federal Reserve begins to unwind it's own loose monetary policy, there is a very strong case for government bonds being the next big bubble. The only problem is, investors have been saying that for years now.
Of course there are always other areas worthy of investigation; biotech, Australian real estate, Chinese Internet stocks, we have only scratched the surface. Just remember, there's always a bubble forming somewhere. It's just a question of finding it.