Wednesday, April 14, 2010

Bubble Time?

While I feel good about the financial rebound from the bottom of March, 2009, I am concerned that a new bubble is forming. I have no hard data yet. At this point, I only have anecdotal evidence.

  • Stories of large gains in the stock market. In the past week, two strangers volunteered how they made significant gains buying Ford stock at the bottom. The first was an attendee at an investment seminar. The other was a cashier at a convenience store. When "everybody" is making money, it is a sign of a bubble forming.

  • Continuing low interest rates. While Congress chastises Alan Greenspan for keeping interest rates too low for too long, the Fed continues to assert that interest rates will remain low for quite a while. HELLO!!! Does the right hand know what the left hand is doing? Is everyone asleep at the wheel? Does this look like the early 2000s again? No, yes and maybe.

    Low interest rates mean easy money and more speculative behavior that will lead to another bubble.

  • A "worst is over" mentality. The world didn't end. Stocks didn't go to zero. Companies didn't all go out of business. The consumer didn't stop spending. Health care reform wasn't devastating. The low expectations have been signficantly exceeded.

  • Fear of missing the next boom. There is still a significant amount of money on the sidelines in cash and bonds, and earning very little. In the meantime, stocks have advanced very nicely in the past year. People are afraid they will miss the next big advance, if it happens.
  • The good news is that we are probably in the early stages of a bubble, meaning there is still a lot of money to be made before the eventually burst. I am hoping for at least one, maybe two, years of significant advances. In that time frame, I hope to lock in significant gains and prepare for the inevitable collapse :-)

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

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

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