Article published by José Alberto León Alonso on 09/29/13 in Diario de Avisos.
We have not yet emerged from the crisis caused by the last financial bubble when the bursting of others is already on the horizon. The reaction of the authorities to the bursting of a bubble, “watering” the markets with cheap and abundant money with which something must be done, lays the foundations for a new one. What will be next?
Certain places seem a little more likely than others to originate them. The stock market is the logical first place to look, as it has a long history of bubbles. However, its recent growth seems to be due more to the end of the fear of depression than anything else. There is no detectable (at least not yet) a contagious wave of stock market optimism about “a new era”, but only a feeling of relief because the light at the end of the tunnel is glimpsed.
As for housing, in developed countries the memory of the recent crisis is too recent to allow a new bubble to incubate. However, in China and Brazil house prices have experienced a spectacular boom in recent years, and in these countries there is no recent experience of similar events. While a real estate crisis in Brazil would have only regional effects, the size of China would cause a crisis on a global scale as it would affect the global financial, bond and raw material markets. Although the Chinese Central Bank has the invaluable experience of the measures taken in the United States and Europe to mitigate the financial and real estate crisis, the size of its own bubble is colossal and difficult to control. China is thus a good candidate for the next outbreak.
The raw materials market is also a good candidate. Firstly, because in this market the rise in commodity prices is accompanied by a fable about a “new era”, typical of any bubble. Climate change and its effects on food prices, the depletion of resources, as well as the need for exotic minerals essential for new technologies associated with batteries, mobile phones and information transmission networks are some of the contagious stories that encourage speculation in these markets. Most bubbles are formed on a real and judicious basis. In the 1990s, falling inflation fueled the bond bubble. The technological bubble that burst in 2001 was based on the belief that new technologies would end economic cycles due to increases in productivity. In reality, it is the excessive liquidity channeled based on correct arguments that pushes prices beyond reasonable values, and if there is something that is left over in the world today, it is liquidity, since the “open bar” of the central banks has flooded the developed world with money.
As a result, although commodity prices have begun to falter in recent months, they have still become more expensive by 150% since 2008. In historical terms, this is not surprising. David Jacks in his article “From Boom to Bust: A typology of real commodity prices in the long run” states that in the long term commodity prices move in super-cycles or cycles with a very long period of about forty years. Since the late 19th century, these have undergone three long-term cycles and a fourth rising phase, driven primarily by changes in global demand. The peaks in the super-cycle are reached every twenty years and we have already surpassed it, so, according to Jacks, after reaching the peak, a bearish phase now begins in which bad investment decisions are purged and agents learn to be more efficient, while the price falls until it returns to its original trend, more in line with its economic fundamentals. Historically, the upswings of all cycles were driven by significant increases in demand, each from a different source. During the current cycle, China's rapid economic growth provided this boost, exemplified by the country's contribution to rising global metals consumption. However, Chinese growth is slowing, endangering the driver of this growth path.
So, what will be the next bubble to burst and when will it do so? Nobody knows. Each bubble is different from the previous one and no one can accurately predict its formation or bursting. Bubbles are social epidemics, fueled by something like a contagion. And it is as difficult to guess the next “irrational exuberance” of the markets as it is the fashion that will take place in five years. Yes, it is possible to detect it once it has formed, but at that point we still need to know when it will explode, to exit just before (at its maximum) and put the money somewhere else. My prophecy record is not very bright. I predicted the end of the real estate bubble in Spain for 2002/2003 and it ended up detonating in 2007, and I predicted the end of the Chinese economic boom for 2009, and it “still” continues to grow at high rates. Keynes said that “the market can remain irrational longer than you can remain solvent,” so the irrationality latent in bubbles often extends them beyond all logic, but they eventually burst.
My personal bet is based on an economic foundation (David Jacks' theory of commodity super-cycles) reinforced by personal experience. They say that before the stock market crash that caused the Great Depression of 1929, Rockefeller was sitting in front of his shoeshine boy one day when he began to comment to him, with great ease and underlining the strength of his values, about the investments he had in the stock market. And it just so happened that these investments (although not their amount) substantially coincided with theirs. At that time the industrialist made the decision to withdraw his funds from the stock market and avoided ruin. The moral is that when everyone is speculating in the same assets as you, it's time to get out. This is relevant because not long ago a person with whom I had a superficial relationship, upon finding out that he was an economist, told me about the considerable investment he planned to make in the purchase of rare minerals, whose demand and price "will multiply without a doubt" in the coming years. I flee as if from the burning of investments supported by this type of comments. Also years ago they tried to convince me of the wonders of investing in Fórum (now bankrupt) and how “safe” it was to invest in stamps, whose value was growing non-stop. Let's not say anything about investment in housing. I was not able to convince any of the above of the irrational nature of their behavior, such was their level of conviction. So, just in case, I will follow Rockefeller's example and stay as far away from the raw materials markets as I can. Don't blow up in my face.
