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Written by José D. Roncal
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Monday, 15 November 2010 01:38 |
Did you take a beating in a bubble? Well get set for more, because apparently we haven’t learned from the past.
What causes a financial bubble? Is it the “greater fool theory,” where prices are driven up by the overly optimistic (the fools) who buy over-valued assets hoping to sell to other speculators (the greater fools) at a higher price? Is it herd mentality, where speculators jump onto a fast moving asset train and sometimes don’t have the sense to jump off until it’s too late? Are bubbles caused by a touch of temporary insanity? Greed? Most likely it’s a combination of all of the above and more.
There was the dot com bubble, the real estate bubble, and, if you look back in history (or pick up a copy of our book,The Big Gamble: Are You Investing or Speculating?), you’ll learn a lot about by-gone bubbles, like the one in the 1600s when all those Dutch folks went crazy for tulip bulbs. That great bulb bubble became known as Tulipmania—one that left a lot of hard working people holding an empty bag.
We’re so over tulips, but we’re still recovering from the housing bubble. And guess what. More bubbles are on the horizon. Here are a few to keep your eye on.
Gold. The price of gold bullion has increased by 377% since 1998. Where you could have once picked up an ounce for under $300, today the price is about $1,400. This modern-day gold rush is a sure sign that a bubble has formed. Yet many hopefuls are still jumping in. If you want more details on what’s been happening with gold, see our September blog posting “Will All That Glitters Be the Next Bubble?”
Green energy. Solar technology has a long way to go before it becomes a proven and viable choice for your portfolio. Yet governments around the world have begun to subsidize solar energy firms. Since 2005, hundreds of venture capital firms have funneled nearly $20 billion into green energy startups. While it’s laudable that so many are betting on an idea that could benefit the environment, it’s likely that very few of these startups will ever make money. Unfortunately, the more money that gets pumped in, the bigger the bubble, the sooner the burst.
Tech sector. Loyal consumers love their Apple products! You’ll see them camped out on the streets waiting for the next big shiny new gizmo. The excitement has pushed the share price up 1,200% since 2001. As long as Steve Jobs is at the helm, the brand continues to represent elegance, cutting-edge style, and savvy coolness. But recently the shares took a hit when news leaked out about Jobs’s ill health. He recovered, and so did Apple, but when a company’s value and image are that linked to a single individual, you have to wonder how long the euphoria can last.
Facebook, Twitter, and Linked-in are reported to be worth billions, but who knows? These companies are ethereal, much like the early dot comers were. With virtually no concrete methods for valuation, you are simply gambling on an uncertain future and a little understood business model. How long before today’s tech bubble bursts?
Currency and Government Debt. Some economist say the dollar is on the verge of a bubble. The burst could come when the foreign market for U.S. assets dries up. When consumers worry about inflation, they don’t buy something that will be worth less in the near term. If inflation kicks in, the rest of the world will drop U.S. dollars like hot rocks.
U.S. government debt is already over the precipice. No one believes that the $13.76 trillion owed to foreign governments can be repaid. In the near future, it stands to reason that China and the rest will stop buying our debt. Can’t borrow money? No problem, we’ll simply print more . . . like the $600 billion in new crisp bills coming soon to a central bank near you. And the ink won’t even be dry.
When the federal government’s bubble bursts; game over. You're all out of bubbles because by comparison, there’ll be nothing left that’s considered too big to fail.
Meanwhile, if you should still happen to have some money to speculate with, try to be diligent and stay one step ahead of the game if possible. Read our bookThe Big Gamble: Are You Investing or Speculating? and learn how to avoid some of the more common pitfalls. |
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Written by José D. Roncal
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Monday, 01 November 2010 18:09 |
It’s Halloween—the season when kids get dressed up and go door-to-door to collect their annual bounty of sugary treats. Last year, in many neighborhoods across the country, there were noticeably fewer flickering Jack-o-Lanterns perched on front porch steps. No welcoming glow of candles, in fact, no glow of anything. Scores of houses sat dark and empty; gloomy remnants of the collapsing housing market.
With the economy still in a frightful state, it will just be more of the same this year. Falling prices, foreclosures, and fear—what else is in store for the housing market?
In our last posting, we quoted a real estate expert who noted, “Homeowners who are disappointed with their decision to buy a home are only discovering what housing economists have always known -- a home should not be considered an investment.”
Of course, that’s the message we’ve been saying all along, as anyone knows after reading our book,The Big Gamble: Are You Investing or Speculating?. The key word is “speculation.” Since there are no guarantees, speculating is all you are ever doing with your money. Houses are not investments, and neither are stocks, bonds, commodities, derivatives, or any number of instruments that consumers pour their money into.
As for those who have speculated in the housing market, there have been a few glimmers of improvement in recent months. But just in time for the ghoulish Halloween season, the latest reports indicate another setback, with median home prices dropping slightly and sales well below the already depressed levels of 2009.
One might expect that a combination of low mortgage rates and bargain-priced homes would have buyers flocking into the market. And they would be, were it not for that other market–the job market. As long as the job market is dragging its feet, consumer confidence will remain weak, and economic recovery will be slow. With so much uncertainty, naturally people are skittish about making such a major purchase.
Solutions are hard to pin down because the scenario keeps changing. All the headlines and hand wringing over the sheer volume of nationwide home foreclosures have now shifted to concern that foreclosures are not happening fast enough. Who could have seen that one coming?
Enter the so-called “robo-signer” scandal, where mortgage holders in a rush to get things in motion, hired inexperienced workers who signed documents without reading or understanding them. This has created what is now known as the “overhang in foreclosures,” with increased inventory and a heightened vacancy rate, and the beat goes on.
And let’s not forget that other factor haunting the market: the high percentage of underwater mortgages. We now know that about one quarter of the home owners with mortgages owe more than their homes are worth. That amounts to a huge potential for even more foreclosures. With the market still hobbling along, consumers are too spooked to buy a home that might be worth less six months later.
The prospects for improvement in the real estate market in the medium and the long-term will depend on job growth. We’ve seen corporate profits go up, so at some point there will be some pressure to start hiring and, then, with new money to spend, the housing market will gradually recover.
In the interim, as long as interest rates remain low, this price plunge might have run its course. If that’s the case, the market may just bounce along the bottom for awhile. That means there may be some potential profitable opportunities in the multi-family sector somewhere out there. If you have the money to spend, keep your eyes open for the right pick. Just don’t fool yourself into thinking you’re making a “good investment!”
Before you make any decision with your hard-earned cash, pick up a good guidebook. We have an excellent one for you. We call it,The Big Gamble: Are You Investing or Speculating? |
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