The Truth About the Bubble

Just because we expect another bubble, it in no way means we are staying out of the markets. In fact, it is quite the opposite.
Just because we expect another bubble, it in no way means we are staying out of the markets. In fact, it is quite the opposite.

 

There’s nothing more exciting than picking up shares of a mining junior on the brink of a discovery or en route to building a mine for production.

There are also many different ways to play these occurrences. Some investors buy on the hype and sell on the news. Others buy on the up and down swings of news releases and money flows. Big money investors, however, sit and hold until a discovery is made or production commences.

Over the past few weeks, we have received a lot of mixed reactions to our past newsletters that speak of what may lead to a strong market correction in late 2010 or early 2011 (see The Crash of 2010). But I think we need to clarify a bit more on just what this means and how we can all learn to play this correctly.

Just because we expect another bubble, it in no way means we are staying out of the markets. In fact, it is quite the opposite. Just as George Soros has said that he is investing heavy in gold assets because he sees a gold bubble (see Smaller Than You Think), we need to be thinking the same way about the markets.

The Bubble Opportunity


Bubbles are bubbles. That means that they get big – really big – before they pop. The key is to know when and what will trigger the needle that pops it.

In time, the market will correct itself. But during this time, staying out of the markets will lead to a lot of missed opportunities – especially in the precious metals sector.

Over the past few decade, we have witnessed two very signifcant bubbles: the dot-com bust and the recent housing/commodities bubble.

During the rally of the dot-com days, everyone got excited about the Internet boom. The NASDAQ 100 doubled in less than a year and kids from their basements were becoming multi-millionaires.

In 1996 Alan Greenspan warned that the U.S. economy was suffering from “irrational exuberance” as the stock market, led by the high-tech and Internet sectors, boomed.

Yet he and the Fed took no action, and added billions of dollars into the economy. Greenspan knew he should have put a hamper on the stock market craze with rate hikes.

But he didn’t – until it was too late. The dot-com crash wiped out $5 trillion in market value of technology companies in two years.

Despite the bubble, piles of money were made for those fortunate enough to get in and get out. As a matter of fact, those left standing, like the Amazons and eBays, have gone to become some of the biggest blue chip stocks today.

A few years after the dot-com boom, recovery was slow and tedious.

This put pressure on the fed to once again cut the Fed Funds rate dramatically over the next few years from a high of 6.25% in 2001 down as low as 1.5% in 2004. This, of course, created yet another bubble.

The housing and commodities bubble

Because of the low rate, housing prices were climbing and many of the homes increased by as much as 200% in less than a few years.

First time home buyers were eagerly racing to snag up homes with low interest rate mortgages. They took on half million dollar mortgages on houses that were worth less than 200k just years ago.

Combine that with offers from mortgage companies that were far too good to be true, and this led to the subprime mortgage crash and the anticipated option arms reset debacle (see The Story Without a Happy Ending).

We are seeing relatively the same scenario in Canada right now.

Housing continues to rise and expand as people race to beat the HST and mortgage rate hikes, spurring a continued growth of housing prices. Young couples in Vancouver are buying two bedroom apartments for $500k plus. What will they do as interest rates rise? How can they afford to pay their mortgages if interest rates and payments doubles in the next few years?

Chance are, they can’t.

But those lucky enough to grab real estate before the interest rate drops a few years back have all made some serious profits by now. I know one nurse who purchased two properties since the recent market crash in 2008 and if she were to sell today, would net a cool $200k plus. Not bad for less than 2 years of investing.

Let’s not overlook the one sector that has continually thrived through all of these bubbles:

Precious Metals


As we have mentioned before in our newsletter (see We’re Back and It’s Time to Prepare) this bubble could be caused by stagflation, inflation, or deflation. But either way, the outlook remains promising for the precious metals sector – especially gold (see Smaller Than You Think) and even more so with silver (see The Report That Shocked the World).

The point is, these bubbles create very significant opportunities in the markets.

Overall interest rates allow us to time these bubbles accordingly.

Think about it this way


When interest rates are low, people spend and borrow recklessly. But sooner or later, the rates will rise and when they do, this will lead to a massive selloff causing whatever bubble to pop.

Right now we are in a state of rebalancing. Interest rates will remain low to help unemployment and spur growth in the housing and job sector. The only difference this time around is that the Fed has never printed so much money and US government spending has never been higher (see The Hidden Agenda).

But don’t let this scare you

Remember, the
dot-com bubble lasted almost three years and the housing bubble in the US lasted close to five. After every bubble, another arises and opportunity will continue in different forms.

So while we see another bubble coming, don’t let this bubble opportunity slip away…

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