The Bailout Bubble

15 December 2008

I am mostly on vacation from the internet at present while I spend my actual end-of-year report-writing interlude and holidays in southern Arizona.

However, I think something needs to be said about what appears to be the next emerging international financial bubble - which I would like to refer to as "the bailout bubble."

The 1990s equity bubble appeared to have been the largest in US history - until it was dwarfed by the unprecedented housing (and debt) bubble.

Now the present bailouts (of any and every corporate entity which has wandered into trouble through imprudent behaviour) are dwarfing the size and scope of the housing bubble.

I am certain that the bailout bubble will have extensive ramifications as well, though they are certainly less obvious than those of the general stock and housing bubbles which came before.

To be honest, I am really watching only two aspects of the bailout bubble, and that is the emerging areas of strength tied to this particular bubble.

These are the bull markets in precious metals and in commodities.

These two bull markets have two distinct drivers.

The precious metal bull market is driven by continued money creation - which of course can now be seen to be going exponential as central banks and governments everywhere print money to stave off a global financial deep freeze.

The commodities bull market has an entirely different driver - which is the entry of the Asian and Middle Eastern economies into the international free market. Obviously the commodities bull is on hold for now, as every sector of the globe is reeling from the aftermath of the housing and debt bubble. The IMF has - quite prematurely in my view - called an end to the commodities bull market. This call is correct for now, but the commodities bull remains in its early stages, and has much further to go, after finding its present bottom and taking sufficient time to shake out momentum and sector rotation players.

The precious metal - and specifically the gold - bull markets are obviously still looking pretty lively. Gold mining costs are now falling rapidly while the gold price holds steady. So look to the gold mining and the infrastructure sectors to be next year's leaders.

And... doubt the IMF - or anyone else - who opines that the commodities bull has had its run. Sorry - this bull is much closer to its beginning than to its end!

More later when I get a moment!!!
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