Next bubble and how to profit form it

[hyten1]

folks

 

was wondering what everyone thought the next potential bubble might be and how would you profit from it.

 

 

[Josh4580]

The US dollar is a bubble.  Profit from it by buying gold bullion

[philassor]

Well take a look at the engouement meter (enthusiasm) and you'll get your first hints:

things like developing markets, bric countries, gold, precious metals, commodities could very well be candidates.

[Uccmal]

I dont see any obvious suspects at the moment.  It will be readily noticeable to everyone on this board and when it happens and you will get many more responses. 

 

The closest I can see is gold, but I would be inclined to wait to short it until it gets closer to $2000 US. 

 

[bookie71]

Maybe gold see

http://www.adn.com/money/industries/mining/story/1005008.html

[hyten1]

its hard to value gold

 

china maybe?

[twacowfca]

Here's how a bubble begins.  

 

Stage 1: Opinion is diverse.

 

Stage 2:  Opinion shifts toward near unanimity that

something very good is going to happen in the future

in a particular aspect that seems without limit.

 

Stage 3:  Herding behavior takes over from rationality,

and the herd tramples contrarians as self reinforcement

causes momentum to build.

 

Stage 3:  Rational agents sit on the sideline as the

momentum of the herd builds, but some rational

agents rationally decide to join the party.  The pool

of rational agents outside the party becomes smaller.

 

Stage 4:  The bubble inflates exponentially.

 

 

 

Stage 5:  Smaller bubbles appear around the bigger bubble.

 

Stage 6:  the rate of inflation accelerates, and approaches

the limit which may be a probabalistic singularity rather

than an absolute limit.

 

                   THE BUBBLE POPS

 

 

[xxx1313]

The USD carry trade might become the next bubble. But I think we are still in stage 3 now.

[Stove]

The S&P seems to be right on the verge of entering stage 4.

[Parsad]

folks

 

was wondering what everyone thought the next potential bubble might be and how would you profit from it.

 

It's a good question to be concerned about, but I think investor's energies are probably better spent looking for undervalued businesses and profiting from them. 

 

When you look for bubbles, you are generally looking for irrationality in a specific area, but as we all know, irrationality can often persist longer than our bank accounts can continue pouring money into hedges.  Unless you can find something where the capital outlay is minimal, while the probabilities of a triggering event occuring over a reasonable timeframe is acceptable, you may be aiming for a lame duck investment.  Cheers!

[Guest Bronco]

I think the next bubble is clearly gold.  I don't think it has topped, but I can see the average Joe buying gold, gold etfs, miners, etc.

 

I am confident that gold will show a 25% drop from its top.  Does that meet the criteria?

[ERICOPOLY]

The supposed equities bubble is confounding me because a rising tide should lift all boats.

 

YTD performance:

Berkshire +6.6%

JNJ  +3.9%

WFC -4%

 

 

 

 

 

 

[Ballinvarosig Investors]

The US dollar is a bubble.  Profit from it by buying gold bullion

Well take a look at the engouement meter (enthusiasm) and you'll get your first hints:

things like developing markets, bric countries, gold, precious metals, commodities could very well be candidates.

The closest I can see is gold, but I would be inclined to wait to short it until it gets closer to $2000 US.  

Maybe gold see

http://www.adn.com/money/industries/mining/story/1005008.html

its hard to value gold

 

china maybe?

I am confident that gold will show a 25% drop from its top.  Does that meet the criteria?

 

12 replies and 6 people think gold is the bubble. Hmm.

[scorpioncapital]

If I may quote Bernanke: It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” Bernanke said in response to an audience question.

 

Nobody knows where the next bubble is, nobody really knows where the current bubble is, if any. Anybody who says they know is lying or suffering from hindsight bias or a lucky prediction.

 

 

[Mungerville]

"12 replies and 6 people think gold is the bubble. Hmm."

 

Does that mean its a bubble or its about to take off because it is undervalued?

 

 

[txlaw]

I don't see any bubble in the U.S. equity markets, though the market as a whole certainly appears overvalued.

 

I'm not a huge fan of gold, but I don't think it's in bubble mode yet.

 

Perhaps people who pay attention to foreign markets can give their assessment of what the valuations are like abroad?

[beerbaron]

US Treasury Bonds could be seen as a bubble with the type of return they give.

 

Equities are entering a nice little bubble. The worst part is everybody knows the bubble is inflated because of a very low interest rate, everybody is playing musical chair thinking they will get out when interest rates raise.

 

Gold, I can't say anything. Contrary to my girlfriend I'm gold neutral  :)

 

BeerBaron

[niels12think]

folks

 

was wondering what everyone thought the next potential bubble might be and how would you profit from it.

 

It's a good question to be concerned about, but I think investor's energies are probably better spent looking for undervalued businesses and profiting from them. 

 

When you look for bubbles, you are generally looking for irrationality in a specific area, but as we all know, irrationality can often persist longer than our bank accounts can continue pouring money into hedges.  Unless you can find something where the capital outlay is minimal, while the probabilities of a triggering event occuring over a reasonable timeframe is acceptable, you may be aiming for a lame duck investment.  Cheers!

 

knowing this has nothing to do with value investing, isn't the rational thing to do the opposite?

(if you can see an asset entering a bubble, and knowing that when a bubble evolve, the irrationality often persist for a long time, then the logical behavior would seem to be buy the assset in order to benefit from the irrational and exuberant increases)

 

additionally, if the logical thing to do is to pour money into the asset creating the bubble, then isn't it logical that bubbles will keep appearing and that the irrationality will persist for a long time and that the risk in participating is actually quite low ( - at least until the burst, that is)?

 

even people realising that it is a bubble and who choose not to participate, might refrain from taking the opposite side of the trade because they know that the irrationality might persist for longer than their bank accounts. And when people refrain from taking the other side of the trade - then this also helps forming the bubble.

 

reflexivity at work?

 

cheers 

[oldye]

You can buy cheap out of the money puts that have no margin requirements and capped downside.

[hyten1]

i think looking for bubbles and crashes are similar to the saying " We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful "

 

i was just wondering what everyone thought, since you can typically make some great returns with fear and greed.

[Mungerville]

I like long-term out of the money calls and puts on the market and gold/silver.

[Uccmal]

If we look at the last two biggest bubbles Nasdaq and US/European housing we could observe that they were building over a period of years.

 

In 1996 Greenspan spoke of irrational exuberance in the markets.  They (Nasdaq) kept on their peak like trajectory for 4 more years after his observation, and a multiple of other alarm bells.  The full deflation of this particular bubble took another 2 years, and arguably just ended this past year with the demise of Nortel.

 

Housing:  This was becoming obvious as early as 2001.  In Toronto Real Estate Agents were setting up storefronts everywhere.  I was in San Diego in 1998 and things were getting absolutely nuts down there, then, 8 years before the final pop.  So from inception to the final deflation has taken nearly 10 years.  

 

Anyone care to bet against a bubble that is not readily apparent right now, knowing it is probably 6 years at least before it deflates?  That's a long time to run a hedge.

 

Taking gold for example.  It could concievably keep going up on an ever increasing trajectory for 3-4 years.  There is nothing to suggest that once a bubble takes hold it may not reach 3000, 5000, or 10000.  By then my mother will want to buy another ounce like she did when it reached 800 all those years ago.  

 

I'll leave it to Prem et al to identify the next one.  They have the luxury of being able to be real early and also being able to write or obtain contracts in a way that minimizes opportunity cost and ongoing rehedging needs.  

 

It is very disconcerting to purchase puts and watch their value go to zero for a year before they start to make you any money at all.  I have some experience in this area.      

[scorpioncapital]

"we could observe that they were building over a period of years."

 

The only reason we say this is because it "popped" and we are looking back. If it never popped, we wouldn't be observing anything. All our explanations are skewed by having the "answer" of what happened. It was much more uncertain at the time. If there was no crash, it would be notoriously hard to say anything about a bubble.

[Uccmal]

"we could observe that they were building over a period of years."

 

The only reason we say this is because it "popped" and we are looking back. If it never popped, we wouldn't be observing anything. All our explanations are skewed by having the "answer" of what happened. It was much more uncertain at the time. If there was no crash, it would be notoriously hard to say anything about a bubble.

 

Scorpion, That was the point I was making if you read the whole post.  Things are not easily obvious or predictable at the time. 

[RichardGibbons]

The only reason we say this is because it "popped" and we are looking back. If it never popped, we wouldn't be observing anything. All our explanations are skewed by having the "answer" of what happened. It was much more uncertain at the time.

 

I disagree with this -- I believe that with many bubbles it is obvious.  It was obvious that tech stocks were overvalued in 1998.  It was obvious that real estate was overvalued in early 2007.  I'm not just speaking in hindsight because I wrote about it here in January 2007:

 

http://www.fool.com/investing/value/2007/01/09/profit-from-the-housing-bust.aspx

 

Right now, it's painfully obvious that Vancouver real estate is overvalued (one just has to look at the cost to buy vs rent, and the median family income in Vancouver compared to the average house price.)

 

In each case, the only thing that seems difficult to predict is when the bubble will pop.

 

IMO, the Bernanke quote (and I think Greenspan said something similar), is a cop out.  It's much easier to say "nobody could have known" than take responsibility for one's failures.  Munger's always talking about bad incentives, and in this case, both Greenspan and Bernanke have every incentive personally to claim nobody could have known. Even if the greater good is to identify and pop the bubble, the fallout for them personally would be extremely negative.

 

What's more, I believe if you cannot identify at least some bubbles, you also cannot identify value investments.  It's basically the same thing -- calculate the intrinsic value of something, and determine if it's more or less than the price.  If the IV is much higher, it's a potential investment.  If much lower, then it's a bubble.

 

By the same token, I don't believe Prem et al. just got lucky with their CDS "hedge", just randomly buying a cheap hedge that happened to pay off during a random panic.  I think they identified something that was likely to be a bubble, and figured out a way to profit from it.