Saturday, March 23, 2013

A Wealth Effect Bubble

In the past twenty years, we've had a dotcom bubble, a stock market bubble, a housing bubble and a bond bubble.   One thing I've learned: low interest rates lead to bubbles.  I've been pondering about what the next bubble will be.  My speculation is that we are in the midst of a "wealth effect" bubble.

People seem to feel wealthier nowadays, with the higher stock market and increasing home prices.  401K investments are higher, investments in one's company stock is higher, and equity in personal residences is increasing.  The Fed has done what it intended to do.

I estimate that the wealth effect bubble will exist for about 1-2 more years as the stock market and housing prices continue to rise.  However, at some point, the Fed will need to reverse its easy money, low interest policy.  At that time, there is a risk for the bubble to pop and reverse the wealth effect gains.

Thus, I continue to be cautious about putting additional funds in investments, since there is still a large risk for a major decline when interest rates start rising.

For more on Reflections and Musings, check back every Saturday  for a new segment.

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

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