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Bubbles rising again
Since folks occasionally ask "how should I invest?" questions on LJ, it seems worthwhile to point out this sobering article from the Economist last week. It's a longish but useful read.

Summary: there are signs all over the place of asset bubbles forming, in all sorts of different asset classes, because of all the cheap money sloshing around the system, including:
  • By some measures, the stock market is looking mildly bubbly, although not nearly as insane as two years ago. When the Dow was in the low-to-mid 9000s, I thought we weren't looking *too* bad; now that it's in the mid-10s, I'm starting to get concerned. The article suggests that even 9000 is probably somewhat overvalued.

  • Emerging-market stocks are looking even more dangerous, because of the amount of over-optimism surrounding them.

  • Some are still talking up gold, and it's hard to evaluate, but when prices have quadrupled you have to suspect a bubble.

  • American house prices actually don't look too bad, but worldwide things still look overvalued.
None of which produces any great guidance: the upshot is that the efforts to stabilize the economy, while moderately effective, are causing overshoots in lots of prices, so *everything* looks a bit risky right now. Which implies that things will probably get pretty unstable again before they genuinely steady, because all of these bubbles need to have some air let out.

My guess is that you should probably assume at least a mini-crash sometime in the next year -- probably not the sort of end-of-the-world disaster we had last year, but don't get overly comfortable with current prices. I don't see any obvious investment choices that I would characterize as "safe" at this point.

(Whether it turns into a true economic debacle depends heavily on whether the Republican noise machine convinces enough people to force the government to close the taps too quickly, I suspect. While the debt issue is a real one, and needs to be addressed forcefully in the medium term, it's worth noting that a sudden reduction of government spending was a proximate cause of both the Great Depression and Japan's Lost Decade. Basically, what the Republicans are arguing for would likely pop all the bubbles simultaneously, which could be pretty devastating. I don't think that extreme is likely, but it would be fairly easy to cause a moderate version of that...)

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I'm guessing in the next to last paragraph, first sentence after the "-", you meant to writer "probably not" rather than "probably".

Quite correct -- thanks for pointing that out...

Indeed. The utter failure to achieve financial reform, combined with the rules changes that allow banks and others to keep bad assets off the books, guaranteed this would happen.

Why does anyone think that if you rescue people from the consequences and don't change the rules the same thing won't happen?

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I have a feeling I'll want to short-sell gold soon. There are investment vehicles and combinations of vehicles that allow you to make money if the price of something goes down, or if the price is volatile not matter whether it goes up or down, or if the price is stable. It sounds like investments that make money in volatility and price decreases will be good bets in the near future.

I'm still kicking myself for not opening up a brokerage account and short-selling stocks a little over a year ago. As soon as I heard of some of the kerfluffle with the mortgages I called it, but didn't have an account already set up.

Yaas. The big danger of shorting, of course, is that you can get screwed if you guess wrong. It's a high-risk, high-reward approach...

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