Five Places to Look for Next Investment Bubble

By | September 13, 2008

Commentary by Matthew Lynn

Dot-coms? Done that. Property? Oil? Corn? Been there, got the T-shirt and nursed the losses, as well.

One thing we know for sure about today’s global economy is that there is always an investment bubble somewhere. If you get in early enough, you can make a fortune riding the boom.

So with property prices collapsing faster than a tent on a stormy day and with the oil-and-commodity bandwagon gone, where should investors be looking for the next big thing? There are five areas worth thinking about: Old Europe, automobiles, stockbroking, the dollar, and private islands.

Anyone looking at the financial markets over the last 20 years would have noticed one common thread: Something is always the flavor of the month. Investors spot a trend, and everyone piles in until valuations become overextended and the whole thing collapses in a heap of bankruptcies and lawsuits.

At the turn of the decade, we saw the bubble in dot-com shares. More recently, we have witnessed the same in real estate — fueled by the availability of subprime mortgages — as well as in oil, food and commodities.

We have seen buying frenzies in the much-hyped BRIC economies — Brazil, Russia, India and China. And there have been bubbles in financial instruments, such as collateralized debt obligations, that helped trigger the subprime meltdown. Along the way, we have some minor bubbles in the things purchased by the people who made money out of the other bubbles. Look at how the price of art or English Premier League soccer teams has soared.

Basic Truth

Of course, bubbles are never entirely ludicrous. The boom always has some basis in reality. The Internet was an important new technology, and a few companies would make a lot of money from it over time. The dot-com boom took that basic truth, and blew it out of proportion.
Likewise, adding China and India to the developed world is going to mean commodities get more expensive. And yet the natural-resources boom took that upward-sloping graph and assumed it carried straight on into the sky.

So where are the next bubbles? You need to find something where there are solid reasons for expecting good growth, but which can also be puffed up into a mega-trend once some smart investment bankers get to work on it.

Here are some places to start looking, bearing in mind that bubbles come in five basic types: places, industries, financing, currencies and luxuries.

FIGs Beat BRICs

First, the place: Old Europe. Forget about the BRICs. The next decade will belong to the FIGs — France, Italy and Germany. We have written them off for so long that we’re in danger of forgetting that all three have been among the richest societies in the world for more than 1,000 years.

As the Chinese and Indian middle classes expand, they will spend money on the kind of upmarket, design-led, history-rich products the FIGs are so good at making. After the credit crunch, their mix of stable, export-led, self-financing growth will look more attractive than the debt-fueled U.K. and U.S. models.

Next, the industry: automobiles. It has been almost a century since we last witnessed a gold rush in cars, suggesting it’s high time for a replay. After oil prices reached records, some of the world’s smartest people began looking more seriously at creating cheap and non-polluting electric cars. If they crack it, a few hundred million vehicles will be replaced within a few years. Think about the fortune the music industry made when we replaced our vinyl records with compact discs and then multiply it by 10,000 or more. It sure sounds like a boom.

Stockbroker Boom
How about the financial bubble? That will be stockbroking. It’s so long since it was in fashion, there aren’t even many left in business. Most are just divisions of investment banks. And yet, there are now thousands of companies with shattered balance sheets from the credit crunch. They need advisers who have strong relationships with investors and can raise money for their clients by selling shares.

That’s what stockbrokers used to do. If you are smart, quietly shut down that hedge fund, and become a stockbroker. In a few years, UBS AG will pay a fortune to buy you out.

The currency bubble will involve the dollar. The markets have kicked it around for a long time, and yet by next year it may well be the U.S. that has the world’s strongest economy. The weak dollar will spark an export boom. Pretty soon we’ll be describing the U.S. as the new Germany — an export-led, manufacturing economy, held back only by the reluctance of its consumers to spend money.

And how will the mega-rich, who make their money from those bubbles, put their new wealth on display? Forget about a Matisse to hang on the wall. That is too vulgar. As for soccer teams, that is just another bubble waiting to pop. The new FIG- automobile-stockbroker billionaires will value privacy and discretion above all else.

There is no better way of doing that than by buying part of a country. Grab yourself a windswept, Scottish island now, ignore the gales howling in from the North Sea, and you’ll be able to sell it for a fortune in a few years’ time. Just remember to get out before all the bubbles burst.

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