The Next Bubble

I've been meaning to write about this for a while but other topics come up that I cannot resist, like maggots. I think that we are going to see a significant run-up in the stock market over the next few months and into 2011. Several factors are contributing to that sentiment.

Most run-ups in the market are lead by a specific group of stocks that leads the market higher. The group that will lead us into the next bubble is anything to do with commodities or agriculture. It is an easy story line for the average person to understand. The population is increasing worldwide and there are limited resources. More of the human population will increase their standard of living and will demand more of those limited resources which will drive up demand and prices. Prices of food, oil, metals, lumber, etc. will all rise based on this demographic trend. Easy for the average Joe to understand, believe, and want to invest in.

Additionally it is easy for the average person to understand that the government is printing tons of money to support its spending. This will lead to future inflation which will also push up prices of commodities. It will also devalue the dollar so people will want to dump their dollars for something tangible.

Similarly, the dot com story was easily understood by the average person. Access to everything via the computer and internet. People saw this as revolutionary and loaded up the pick up truck with any stock that had to do with the internet. A bubble was created and people did not look at the underlying fundamentals. Remember the dot com period where taxi drivers were giving stock tips. That was the indicator that the bubble was ready to pop. When the stupidest guy on the street was buying that was the time to sell. Right now the average guy hasn't been buying commodities, yet. Additionally, there is no other asset class with reasonable returns and people will be looking to hop on the next "easy money play".

The smart money has already entered this market. It has already run up quite a bit and large profits have been made. But soon I think the stupid money will be entering as headlines keep stressing the record prices of gold, etc.. As the stupid money comes in prices will inflate beyond the fundamentals which will lead to bubble formation as people see it as an easy money play. As for me I have not invested in commodities but i think a commodity ETF or an agricultural ETF would be a wise move now. I think it has a long way to run. The trick is not to be greedy and get out when the taxi driver tells you how many gold coins he has accumulated.