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What’s the next big bubble? Green energy? Gun sales? Food? Nobody knows for sure.
Based on our research, 12 new bubbles already show potential to make and ruin investors. The markets listed below range from bubble-in-the-making to ready to pop:
1. Gun sales
Anticipating anti-gun legislation, certain Americans are snapping up guns to hoard, collect, or safekeep. Some are even stockpiling for investment purposes.
According a gun buyer mentioned in this Wall Street Journal article, a collection of "assault weapons" could triple in value if the federal government re-enacts a ban on their sale. Background checks on potential gun buyers increased by 27% in the past year, according to the article.
Some guns have already appreciated. For example, European-made AK-47s doubled in price between September-December 2008. For savvy buyers, the right to bear arms is also bearing fruit. The question is: When's this bubble going to burst?
7. Option ARMs
Starting in May 2009, option adjustable rate mortgages (ARMs) have been causing "more delinquencies and foreclosures than subprime mortgages," according to a Wall Street Journal article written in July.
Option ARMs allow homeowners to pay partial interest on their home loans for a predetermined period of time. In some cases, the unpaid amount of interest is added to the loan's principal. Once the partial interest window expired, homeowners are left with potentially unaffordable payments.
Combine that will falling property values, and you see yet another loan-inspired disaster. According to the Wall Street Journal,
As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure. Option ARMs are concentrated in California, Florida, and other hard-hit housing regions, writes the WSJ. Wells Fargo, J.P. Morgan Chase, and the FDIC's insurance fund hold a large proportion of option ARMs, so a burst bubble will hit them especially hard.
It's just a matter of time.
3. Cap & Trade
In September, the Senate will vote on the American Clean Energy and Security Act, which should really be called the Clean Energy Securitization Act. The act will create a cap-and-trade market that will create new derivative-friendly asset classes, according to this Christian Science Monitor article.
The government will, if the act passes, activate a market for carbon allowances and carbon offsets. The former are permits allowing companies to pollute; the latter, pollution permits that require companies to offset their carbon emissions elsewhere.
That, writes Mother Jones reporter Rachel Morris, is just the beginning. Once permits hit the market, financial experts will convert them in derivatives with names like "offset futures" and "allowance swaps."
Bubblemania will ensue if the government shies away from regulation and enables the same kind of chaotic, over-the-counter system that enabled the mortgage-backed securities crisis.
The financial industry is currently lobbying for minimal regulation. If the bill goes through in September, and the government steps back from applying regulation, subprime carbon might not be too far away.
4. Incandescent Light Bulbs (EU)
A pending EU-wide ban on incandescent (traditional) light bulbs is causing consumers to hoard the soon-to-be unlawful products. Manufacturers are enjoying massive sales as a result.
The Spiegel article covering this bright bubble news didn't mention anything about people hoarding for investment purposes, as they are for guns, but that certainly remains an option. The bubble will burst in September, when stores no longer sell incandescent lighting, and it will really burst when CFL (compact fluorescent lightbulb) technology improves enough to make people toss out their old incandescent.
5. China
Chinese stock markets have been surging, fed by easy credit from government-linked banks. The Shanghai Composite rose 16% in July alone. Banks extended $1.1 trillion in new loans during the first six months of 2009.
What's more, a Chinese company enjoyed the biggest global IPO of the year. China State Construction Engineering Corp. raised $7.3bn in one day. The Shanghai Composite Index dropped 5% as a result: Investors feared that the same speculation that had increased CSCEC's stock value by 56% was also overheating the market.
Unfortunately, China’s economy remains export-driven. The numbers are a smokescreen. The Chinese government is powerful enough to "make the right numbers appear" if it thinks the country's economy needs stimulating, according to Contrarian Edge's Vitaliy Katsenelson. "(T)he government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system restabilizes," he says.
China is experiencing "asset bubbles that look like economic growth," writes Bloomberg's William Pesek. Will China’s market manipulation survive the recession, as the government has planned, or will the bubbles all burst?
6. Gold
To many investors, "quantitative easing" is synonymous with "buy gold as fast as you can!"
The problem is that more money in the mint doesn't necessarily mean inflation. What if the Fed printed less money than was lost in the financial crisis? What if consumer demand remains low and producers can't increase their prices? Or if, after banks recapitalize, there isn't any extra money left? Or electronic money messes up the whole notion of quantitative easing?
Gold will spike when in inflation hits, but if there's no inflation, speculators will be left empty-handed. Then again, if–as some goldbugs claim–the dollar weakens further, global financial systems collapse, and governments fail, it’ll be nice to have some bullion on hand.
7. Higher Education
Elite schools like Harvard and Yale have frozen some faculty salaries. What gives? It's a widespread endowment dry-up, according to The New York Times' Steven M. Davidoff. He explains that in recent years, endowments and tuition hikes have enabled universities to expand buildings, programs, and faculty, as well as increase salaries.
With the economic crash, however, endowments have shriveled. The Harvard endowment, on which certain parts of the university heavily rely, used to enjoy handsome portfolio returns: Its private equity portfolio gained 28% during the past decade. Now, it is facing more than 30% losses, according to Davidoff's calculations. He estimates that up to 40% of Harvard's assets are illiquid, meaning that it will have to aggressively raise donations or increase its liquid returns to fund itself and its private equity obligations.
"This results in a spiraling decline in Harvard's liquid assets as each year they go lower to meet these needs and more and more assets become tied up in private equity," writes Davidoff. Ouch. Overdependence on endowments and private equity is bursting the higher education bubble, especially at the top tiers.
8. Trustafarianism
Photo By Charles Sykes / Rex
Bubbles can be cultural, too. Just ask the hipsters featured in this New York Times article, who freeze in shock after being informed that full-time jobs last eight hours a day. For many, the parental bailout is a bubble that has either deflated or burst.
9. Alternative Energy
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