Noni Mausa: Snap Crackle And Pop…What’s The Next Big Bubble?

This one is by Noni Mausa….

Okay guys, lets start an office pool to guess what the next big bubble is going to be.

Bubbles seem to be pretty common. I am using the term a little loosely here, to describe any situation where three (and often four) things happen

1. the perception of value of a property or investment swells (or is misrepresented to appear) far beyond its true value. This may or may not be due to malfeasance.

2. persons familiar with or close to the property or with investment in general (insiders) take profit (extract true value from apparent value) from dealings in the property. This may or may not be due to malfeasance.

3. the value of the property collapses, leaving less knowledgeable investors (suckers) with empty bags, but often leaving the insiders flush.

4. A fourth element can be restitution paid by a secondary sucker to primary suckers. Friends, relatives, charities, and various levels of government will often have to assist the primary suckers after the collapse.

The South Sea Bubble, the Megatherium Trust, Tulip Mania, the Dot.Com Boom, the Bre-X gold mine bubble, the recent sub-prime housing bubble and Enron’s … well, Enron’s everything, all show this progression. Various large frauds also show this progression.

Most of these properties had a real-value component (tulips, rum, slaves, electricity, international postal reply coupons) but that real value, as the bubble progressed, was dwarfed by expectations driven by advertisement or frank falsification.

Since value is a form of desire, the insubstantial component of the value of the bubble property is made up of faith, the willingness to expend real resources and effort toward an insubstantial goal. The whole bubble might be called a faith-pump. In the absence of really good drugs, faith is a limited resource. In addition, faith is essential to all economic activity. When Krugman talks about a crisis of faith, this is a crisis of the very yeast that makes large economies possible.

Most economic bubbles come into existence, grow and pop over a few years. A much slower example of the faith-pump are the many US pension funds which have either been sucked back by the companies, or have lost value because of unfortunate or foolish investment choices.

Large bubbles must involve at least one large financial institution, if only to pay salaries, hold a line of credit, cover the phone, heat and light, and handle the incoming cash. In addition, there must be at least the appearance of sense and oversight to the project, provided by other institutions.

Bre-X, the fake Canadian gold mine in Indonesia, was lent legitimacy by Kilborn Pacific Engineering Ltd, which evaluated the falsely enriched ore samples sent to them by Bre-X. Enron had Arthur Andersen Accounting, and the South Sea Bubble beat them all with the Bank of England and the government of England. These institutions must be either fooled or suborned, but they have to be there.

The net effect of a bubble is to move a portion of the wealth of less informed investors into the pockets of better-informed ones, or persons involved in the business. Being less informed is only a partially correctable condition, since deceit and the involvement of apparently trustworthy guarantors is essential to the bubble. Only an understanding of bubbles and their features is likely to be any help.

So now the question is, where is the next bubble likely to come from?

* What has been deregulated lately?

* In what areas is regulation present but ineffective?

* What sectors or industries hide, or are capable of hiding, their intrinsic value?

* Where are there high cash flows that might be diverted?

* What sectors hold most of their value insubstantially by definition – that is, in the future, in plans, in possibilities?

* What possible investments are highly desirable by their nature – in medicine, in fast money, in unlikely benefits, in attractive oddities? What pushes people’s hot buttons?

As reliably as the next streetcar, the next bubbles are coming around the corner. Their scrutineers are facts and reality, cool oversight, firm regulation. Their supporters (knowingly or not) are foolish hope, greed, a belief in appearances, a desire for unearned benefits, laziness and a disregard for the public good.

What’s the route listing on the next investment streetcar? Is it #33 Nano-Tech? #55 Micro-Processors, #18 Gene Engineering or #58 Anti-Geria Medicine?

Some of the streetcars, for sure, will take you to the bright downtown district of blues nightclubs, good food and big bank accounts. But other routes will take you to the end of the line beyond the coldest of fringe suburbs – and from those routes you will have to trudge back home in the dark, after midnight.

This one was by Noni Mausa.