Sunday, August 02, 2009

Expecting Another Bubble

As the economy recovers from this recession, I believe that we will experience another asset bubble, like the recent ones in tech stocks (late 90s) and housing (mid 00s). In both bubbles, low interest rates were the main driver. Low interest rates were used to increase liquidity prior to Y2K and low interest rates were used to mitigate the 2000-2002 recession. Today, the Fed has made interest rates even lower than the previous two times. As Yogi Berra once said, "It's déjà vu all over again."

Of course, the three important questions to answer are: 1) In what asset?; 2) When will it start?; and 3) How long will it last? My answer is I don't know. If I were to guess, my answers today would be:
  1. Emerging markets and commodities.
  2. Within the next year.
  3. A couple of years.

Why will the bubble happen? Everyone, including governments, gains during a bubble and therefore, there is little incentive to prevent one. It isn't until after the bubble bursts that the economy suffers and people realize there was bubble.

Hopefully, by expecting another asset bubble, I think I can protect our savings better than was done during the recent housing and financial crash.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

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