Bursting Bubbles.
BEING STREET SMART
by Sy Harding
ANOTHER BUBBLE BURSTING? March 20, 2008.
Let’s talk about something positive for a change.
Tired of paying ever higher prices for everything from milk to gasoline? Relief may be at hand, since it looks like yet another ‘bubble’ is bursting.
It used to be that bubbles were rare occurrences, maybe one per generation. But the current generation just can’t resist chasing higher prices in markets until those markets are driven into bubbles. In just nine years we’ve experienced the dot.com and tech stock bubbles of 1999, the real estate bubble of 2005-2006, the debt/credit bubble, and the current commodities bubble.
The period around 2001 was a pivotal point. The previously bubbled stock market was suffering a severe bear market in which the Nasdaq lost 78% of its value. So money was coming out of the stock market, moving into real estate. Washington flooded the financial system with easy money, and cut interest rates to their lowest level since Eisenhower was president, in efforts to pull the economy out of the 2001 recession. Real estate prices had already risen substantially, and the easy money made it possible for anyone to join the fun. Speculators, many having no experience at all in real estate, rushed in, paying any price, convinced as they had been about the Nasdaq in 1999, that home prices could only go ever higher.
When the real estate bubble burst two years ago, surviving speculators (those who got out early) looked around for another area where big gains could be made, and spotted commodities.
Crude oil, which was changing hands at $18 a barrel in 2001, had already risen to record highs above $60 by 2006. But as speculators, ranging from neophyte individuals to giant hedge funds, piled huge amounts of additional money in, oil rose to as high as $110 a barrel earlier this week, a 510% increase from its level in 2001, but more ominous, almost double its level of just a year or two ago.
Natural gas, heating oil, copper, grains, all easily traded commodities at the futures exchanges, also spiked up to prices four and five times their levels of 2001.
Gold, the centuries-old traditional hedge against inflation, rose from $255 an ounce in 2001, to $660 an ounce by last August. But as latecomers piled in, it gained another $380 an ounce, almost 60%, in just the seven months since August, in a spike-up rally to a new record of $1,028 reached earlier this week.
But we know what always happens to bubbles. They can be stretched only so thin. And that did sound like a loud hissing noise this week.
In just four days, gold plunged more than $100 an ounce. The gold mining stocks, as measured by the XAU Index of Mining Stocks, plunged 17%, back to their level of last September, six months of super spike-up gains lost in just four days.
It does look like gold, the traditional predictor of inflation, may be signaling that the commodity bubble is bursting. The price of oil fell $10 a barrel this week, almost 10%. Wheat futures plunged 10%. The DJ U.S. Basic Materials Index fell 8%.
Except for commodity speculators that is not bad news.
The bursting of the dot com and real estate bubbles had serious negative results for most everyone. The dotcom implosion in 1999 led the way to a big decline for the entire stock market, and the 2001 recession.
The bursting of the real estate bubble, still underway, resulted in problems in many areas, including the current crisis in the financial system, and the current economic slowdown.
But that speculators in the commodities bubble may be having their heads handed to them could well have positive ramifications for most everyone else, at least in the U.S.
Consumers may find life easier if the speculative fever is taken out of gasoline and food prices and they begin to decline back down to more normal levels.
For U.S. investors worried about the weakening economy, lower commodity prices would lower consumer and corporate costs in the U.S. , and may thus boost consumer spending. Removal of inflation fears would also make it much easier for the Fed to continue to lower interest rates.
Declining commodity prices may even be a positive for the long-suffering U.S. dollar, since most commodities including oil and gold, are priced globally in dollars. That would not be good for foreign countries where many commodities are produced, but presumably the U.S. would not be sending so many dollars overseas to purchase those commodities.
So there you have it, something potentially positive going on, in addition to the stock market rallying off its lows of last week.
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A lot of gold bugs out there. To many.
Is the run done?
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