10 Market Bubbles That Could Soon Burst

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bubbleThe president of the Minneapolis Federal Reserve, Navayana Kocherlakota, recently published a paper in which he argues that government guarantees helped fuel the bubble in real estate. While his paper was largely aimed at prescribing solutions to this problem, it raises the question: What other bubbles are lurking out there in the global economy? We asked several experts and to our surprise, they had a long list:

1. Gold. The price of gold bullion has risen from $294 an ounce in 1998 to $1,404 today, an increase of 377%. "It's the biggest, baddest bubble of them all," says Robert Wiedemer, author of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. Gold has no intrinsic value. A telltale indicator that gold is a bubble: incessant cocktail party chatter about buying gold and endless TV commercials offering to buy gold jewelry. The SPDR Gold Trust ETF (GLD) is up 28% since the beginning of the year.

2. Real estate in China. Chinese real estate prices are up only 9.1% this year, which may seem more frothy than bubbly. But rising prices are generating rising demand, which is a clear sign of a bubble, says Vikram Mansharamani, whose book, Boombustology: Spotting Financial Bubbles Before They Burst, will be published early next year. The participation of amateur investors like waiters and maids in the property boom is a clear sign of a property bubble in China. The fact that developers are building more apartments than there are buyers is another giveaway.

3. Alternative energy. Solar technology is still uneconomic, yet governments all over the world are subsidizing solar energy firms. "There are plenty of people who shouldn't be in the solar energy industry who are," says Mansharamani. Do we really need 250 venture-capital-backed solar cell companies? The Market Sectors Solar Energy ETF (KWT) had a 100% gain this year, before dropping back.

4. Commodities. Blame it on the weather, China or the Fed, but commodities have shot higher in recent months. Wheat is up 60% this year, and other food commodities like corn have also risen dramatically. "The focus is on the food category for bubbles," says Wiedemer, but industrial metals like copper are also very frothy.

5. Apple (AAPL). OK, everybody loves their iPad and iPhone (except if they live in New York or San Francisco, where signal strength is a problem). But Apple shares are up 1,200% since 2001, which has to come close to being the definition of a bubble. "Apple is a high-fashion company," says Wiedemer. "If CEO Steve Jobs either leaves or dies, I think they will have trouble maintaining that incredible fashion sense, and as such it's time will go," he says.

6. Social networking.
Sure, Facebook has 500 million members, but what is that worth? Some estimates put the company's market value as high as $35 billion, but shares in these social networking companies are not listed and are so far only traded by a few insiders. Twitter, with almost no income, is said to be worth $1.5 billion, and LinkedIn is also estimated to be trading at a market value of $1.4 billion. "There aren't any anchors or valuation methods to guide investors in terms of valuation," says Mansharamani. "When you have that lack of clarity, almost anything is possible." Many in the tech world try to figure out what these companies might be worth some day far in the future and then discount that back to some reasonable price today. Remember Boo.com?

7. Emerging market stocks. As an asset class, these shares have risen 146% in the past two years. "We're only halfway along the way to a gigantic eventual bubble in the emerging markets," says Barton Biggs, the former Morgan Stanley Asset Management chairman who accurately predicted the U.S. stock market bubble in the late 1990s. These countries, such as Indonesia, Australia, Russia and Brazil, are growing wildly even though there's no growth in the world economy. Much of their gains is backed by commodity prices, which are also a bubble (see item No. 4). "I have every reason to believe this will turn into a bubble," says Mansharamani.

8. Small tech companies. It's only been a decade since the tech bubble burst, but cash-rich large tech companies are gobbling up smaller firms without regard to price. For example, Hewlett-Packard (HPQ) got into a bidding war with Dell (DELL) over computer storage company 3Par and ended up paying a whopping $2.4 billion, 325 times the firm's earnings before interest, taxes, depreciation and amortization.

9.The U.S. dollar. Although the dollar is down 10% against the euro so far this year, Wiedemer believes the greenback is firmly in bubble territory. He believes it will pop when foreigners stop buying U.S. assets such as stocks and bonds. "Foreigners say, 'I'm worried about inflation -- you're going to pay me back in dollars worth less than when I invested'." While China may hold its dollar bonds forever, he says, pension funds in Japan and insurance companies in Europe will start dumping dollars as U.S. inflation climbs.

10. U.S. government debt. "When this bubble pops you're out of bubbles -- nothing is too big to fail any more," says Wiedemer. The debt bubble is growing very rapidly and will continue to grow, he says. Basically, there's no way the U.S. government can ever pay back the $13.7 trillion it currently owes (mainly to foreigners), and eventually they will stop buying. The bubble pops when the government has trouble selling its debt -- just like Ireland and Greece are experiencing at the moment. Instead of borrowing money, the government starts printing money, which is what's happening now. The Fed's balance sheet has gone from $800 billion in 2008 to $2.2 trillion, and the central bank just announced it was printing another $600 billion. Says Wiedemer: "The medicine starts to become poison."


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259 Comments

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iporsborg

What about the bond bubble?

November 16 2010 at 4:35 PM Report abuse +1 rate up rate down Reply
ltom42

It sounds like everything except money in the mattress is about to crash. What's an investor to do in this multi-bubble environment?

November 15 2010 at 2:25 PM Report abuse -1 rate up rate down Reply
Imust

too many contridctions to be taken seriously.

November 10 2010 at 6:36 AM Report abuse -3 rate up rate down Reply
ronsjigslures123

I agree gold is still used as a conductor but silver will be used more in the future, and besides silver is used in many products that you would not belive like Heart medications,and many other medications in general and even TO expensive make up your wife uses to even film. So it will be around for a long time.

November 10 2010 at 5:22 AM Report abuse rate up rate down Reply
ronsjigslures123

small investors should be buying troy pound bags of silver coins anywhere they can, there is a lot of companys that sell them that way, sock those bags in safty deposit boxes and when it hits 80 to 100 bucks a oz. sell them and you will make a good profit, if you own some good mining stocks when it hits that high you will reap that money also. Keep both eyes on silver it will pay big time in a short while, Pladdium has gone up 250 bucks a oz in less than a year, and that commodity will make it to 1 grand a oz easy. It alrady did back in the 80,s.

November 10 2010 at 5:16 AM Report abuse rate up rate down Reply
ronsjigslures123

Silver is still the best bang for your buck today and in the future, if you own one little mercury dime its 90% silver prier to 1964, and even the Isonhour silver dimes that dime today is worth is silver approx. $1.50 cents for that 10 cent coin, as a coin its still only 10 cents purchasing power. When silver reaches 80 to 100 bucks a oz. that same coin will sell for approx. $3.70 cents to 4 bucks, and thats not if its clean and a good date sells to collectors much higher. Thats what makes silver a good investment when some one will hand you 4 bucks for a DIME , 10 cents and 30 bucks and up if a good date, its almost like a crime when you think of it.

November 10 2010 at 5:07 AM Report abuse rate up rate down Reply
ronsjigslures123

Another thing about silver is its used as the best and cheapest conductor of battery electronics,i pods,cell phones and etc. so its not a bubble and will be used for manufacturing for years to come. Gold is to expensive to use as conductors in electronics so silver will be the prime thing. If you not into silver as coins and bars, check out silver mining stocks many USA mines are going OK in these bad stock market times, and when silver gets much higher they will do much better, one of the richest USA presidents of all times when president some years ago bought USA silver mining stocks cheap and became a millionare and listed as the richest USA presidents of all times. Google it and see his name and story. In the 1980,s China bought thoudsands of tons of silver in all forms when the price hit 50 bucks a oz. they sold most of it and made billions .. this is what financed the China industrial revalution that they are today. Silver might be called the poor mans gold but threw history have made many very rich people and even a few countrys.

November 10 2010 at 4:50 AM Report abuse rate up rate down Reply
1 reply to ronsjigslures123's comment
hoppah

Gold is used as a conductive surface in nearly _all electronics_. Silver isn't, because, although it's the best conductor, it tarnishes. Gold does not.

November 10 2010 at 4:54 AM Report abuse rate up rate down Reply
theendoflore

I have to disagree with the gold and commodities predictions. They just prove how devalued the dollar has become, but then so do all of his other eight.

November 10 2010 at 4:40 AM Report abuse rate up rate down Reply
ronsjigslures123

I realize many people are bullish on gold, but there is two other commoditys that have had a steady up in price better than gold in % wise, thats silver and pladdium. Silver is a slow and easy race winner the little jumps are like putting pennys in a jar, a few pennys a day and before you know it you have enough to have a dollor worth and so on. Buy all the silver you can in bar,90% coin, and even 40% coin form. Make sure its tested for the real stuff and sit on it for the next year and a 1/2 when it sells for over 100 bucks a oz. Its already in the 30 buck range right now and slowy creeping up each day.

November 10 2010 at 4:38 AM Report abuse rate up rate down Reply
Bill

Someone who finally is making sense of this mess our country is in.

November 10 2010 at 4:01 AM Report abuse rate up rate down Reply