Bubbles, bubbles, everywhere

Some investment market, in some part of the world, is out of whack at some time or another. Take a look at these examples.


If you haven’t heard of it yet, let me be the one to break the news to you. China is in a gargantuan real estate bubble. Here are a few facts to consider.

• CNN: Beijing: apartments selling for $11,400/square meter
• Bloomberg: home prices have tripled since 1998; real estate makes up 60 percent of household assets
• Businessweek: 1/3 of China’s economy is real estate related; China’s four largest cities saw annual price gains of 16-20 percent
• MSN: Chaoyang district: typical apartment prices are near $300/square foot or 80 times the average income


The U.S. is experiencing another, albeit much smaller, tech bubble. Here are the P/Es of several major tech and related stocks. Remember, the higher the number the more over-valued the stock.

• Amazon: 1322
• Facebook: 119
• LinkedIn: 997
• Netflix: 282
• Twitter: N/A (they don’t even have any earnings!)

The S&P 500 has an estimated 2013 P/E ratio of only 16.


The Fed is buying $85 billion of treasury securities every month. This adds up to $1.02 trillion each year. Is this a positive action for stimulus? Sure. Is it leading to wrong valuations on treasury debt? Probably.

The current price for a 30-year T-bond is about 98.95. That means it trades at a 1.05 percent discount to face value. Yet, without the extra one trillion in government purchases, this price should be much lower. Add in the eventual interest-rate increase, someday in the future, and treasuries are probably going to nosedive in value.


Precious metals have had an 11-year streak. That alone should make an investor run. Past bubbles teach us that nothing goes up, without interruption, forever.

Gold was recently at $1,276 an ounce and silver at $20.43. Arguably, these are reasonable prices. These general levels might even be permanent. A sort of inflation adjustment. But beware: gold and silver can have decade-long bear markets.


With all of these bubbles, along with our markets regularly hitting new records, are we in yet another bubble? I don’t think so.

Using earnings estimates from Thompson Reuters, the S&P 500 will have a P/E ratio of 13.1 in 2015. That’s based on a current price of 1784 for the index, putting it well below the 85-year average P/E of 15.6.

Will we have volatility, corrections and bear markets? Absolutely. But I think we’ll have more earnings growth and more years to this new super-bull market.

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Categories: Finance