MarketWatch recently ran a piece titled The next 10 investment bubbles by Wallace Witkowski, and I thought this would make a nice follow-up to last week's commentary on the Two-Term Presidential Curse where two-term presidencies appear to end in bubbles and busts.
Bubble # 1: U.S. Stocks: The U.S. bull market is now almost five years old with the S&P 500 up 170% since its March 2009 low. The last 10% correction ended in June 2012 and the S&P is up another 40% since... and while corrections normally reset markets, what's different this time is the environment of extremely low interest rates and the $85 billion in monthly stimulus that's fueling the rally in stocks. Of course, solid earnings have also reassured investors but talk of the Fed slowly ramping down its 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: Now - there most definitely are a few stocks such as Tesla Motors and Facebook, to name a few that have surged beyond fundamentals. Over the past year, Tesla is up about 336% and Facebook is up about 135% with many analysts in agreement that shares of momentum stocks such as these have risen to levels well above fundamental value.
Bubble # 3: Bitcoin: Some of you may have heard of Bitcoin - an alternative currency not controlled by central banks (which adds to its allure). As you would expect many, including the underworld, like Bitcoins as a nationless currency in which they can freely transact business away from government controlled banks. Believe it or not, bitcoin prices are up almost 2,500% in 2013, with a gain of nearly 76% in November alone to about $400 per Bitcoin... Even Internet giant Baidu (China's Google) recently started accepting Bitcoins as payment for services. Several Bitcoin startups have also received significant venture funding - so something new is afoot here.
Bubble # 4: Investment Grade Scotch: Wow - who would've thought scotch whisky would make the list... but turns out investors have significantly bid-up prices of rare whiskies as a must-have collectible. A Scottish company that tracks whisky auction prices says prices have soared 170% since the end of 2008 with rare scotches fetching four- and five-figure sums per bottle! Of course, high prices have prompted many distilleries to release their own limited-editions that could push up supply and cool prices... but skeptics think prices could go even higher because newer limited editions may not meet connoisseurs' high standards for a good scotch.
Okay, I'm going to collapse a few categories now in the interest of time, so here they are.
Bubbles #5 and 6: Property values in London and China: Property prices are on a tear in London, with prices up 10% in October alone and set to rise higher on positive UK economic data. London sees higher demand for homes than supply, partly with turmoil in the Middle East driving money into London property as a safe-haven investment. While rising interest rates may curtail domestic demand, they're unlikely to dampen demand from foreign moneybags.
Similarly, property prices in China were up almost 11% in October - the highest growth rate since June 2011 - reigniting fears of a fresh bubble and prompting the government to tighten credit and stabilize growth. Lack of confidence in China's murky stock markets is also driving money into U.S. real estate that could well boost property prices at home.
Bubble #7: U.S. Farmland: Prime U.S. farmland has seen a 20% jump in price over the past year to $8,400 per acre - continuing steep upward gains since the late 1980's, almost without a meaningful correction. Prices are particularly high in the heartland where corn and soybean crops grow well - with land price gains fueled by soaring commodity prices and low interest rates. However, farmland prices look like they may avoid a bust as commodity prices retreat from earlier highs and as interest rate increases weaken credit availability. So U.S. farmland appears to be headed for a smooth landing, not a crash.
Bubble #8: Cattle and beef futures: Cattle futures are at an all-time high since November 1984, to $1.34 per pound from slightly over a dollar a pound at the beginning of the year. Prices have spiked because - over the past few years - farmers trimmed their herds due to droughts and high feed costs that made cattle farming unsustainable. Now, supply lags demand, but rising beef prices may slow beef consumption in favor of cheaper alternatives such as chicken and pork. With feed prices dropping in 2013, ranchers may start to build herds and stabilize supply and demand by the end of 2015 - so, again, a crash is unlikely.
Bubble #9: Student loan debt: Over the past ten years, federal student debt has tripled to over $1 trillion in June 2013, with default rates rising sharply since the financial crisis in 2007 with jobs hard to come by for new grads. Default rates are up 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 start-ups, IPOs: The market for IPOs has been very frothy of late with first day gains of 100% in some cases. Of recent IPOs - Twitter is up 64% - to $42 from its IPO price of $26 - even though it is yet to report a profit. Potbelly Corp., a sandwich restaurant chain, went public at $14 and now trades at about $30, up over 100%. Encouraged by this highly receptive market, many other start ups without profits - such as Chegg that just went public on Wednesday - are also hitting the market - raising hundreds of millions in cash and garnering billion-dollar valuations on zero profits. It's sort of like the go-go dot-com days and many analysts are wary of these eyebrow-raising valuations.
So there you have it - 10 potential 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 there's something completely out of left field that hits us and takes markets down... only time will tell.
Steve Pomeranz is a Managing Director for United Capital Financial Advisers, LLC, "United Capital", and owner of On The Money. On The Money is not affiliated with United Capital.