So when thinking about the sort of tally that I discussed in my first post it occurs to me that most of my predictions are political or financial in nature.
In this post, I want to focus on financial predictions.
These financial predictions tend to be predictions regarding market directions; I generally predict these changes but never deduce/implement a plan to exploit it.
My most noteworthy prognostication is the housing and .com bubbles.
At the height of these bubbles I felt like I was on an island: holding my contrary opinions in-spite the masses of financial analysts that saw never ending profits through some kind of new financial paradigm that was emerging.
In-spite my longterm vindication, in the short-term the bubblers carried the day as they made record profits playing the bubble. Thus, for many years I was pragmatically in the wrong.
Timing
I recall being 17 years old and discussing with my father how we should purchase a put on Yahoo! as I could not comprehend how their stock price could be so highly valued when they were losing money (note that by “we” I really meant “he” as although I was trying to instigate this action I had about $2000 net assets at the time and thus was in no position to do anything). He and I were in agreement with this assessment but the issue he pointed out to me was “Timing.” When buying a put, or making any sort of speculation on the downward nature of a stock or market, one has to pay high premiums for the size of execution window. To steer away from me providing poor descriptions of market technicalities, what I am saying is that it is very expensive to hold a position betting on a downward direction when you do not have a very specific timeline for the decline. One either pays a lot up front for a longer period of time, or you pays expensive margin calls as the market keeps going the “wrong way. “ In the example of my Yahoo! dilemma, if we would have purchased puts on Yahoo! back in 1999-2000 my father and I could have potentially enjoyed a 10 times+ return on our money. But, how could we have been confident that it would drop within the year?
The housing bubble worked much the same way for me as I could see the bubble and the ludicrous nature of the lending policies, but I saw no way of capitalizing on the situation financially without having to pay excessive timing premiums. Keep in mind that my predictions of the demise of the housing market began approximately in 2004-2005, and the fall did not occur until 3-4 years later. The best I came up with to act on this prediction was sitting in my apartment for another 3-4 years bitching about speculation and poor home buyers.
Macro Bubble Flow
After ruminating on these two bubbles recently, I now believe that these two bubbles are essentially the same bubble. The flow of capital from the .com bubble flowed into the housing bubble. As the wind came out of the sails of the .com bubble, the proceeds made during this period had to go somewhere and pension plans and average investors were looking for “safer investments.” This led many to move much of their massive bubble proceeds (as well as new investments) into mortgage back securities (MBS), which helped lower mortgage costs for all sorts of housing consumers. Obviously this was all aided by short sighted consumers, poor lending practices, and an irrationally exuberate Greenspan providing excessive fuel for this next bubble by cutting interest rates. I will not do a full shabby analysis of this situation here as I feel that is better suited for better versed individuals writing more profound blogs than this one. However, the key idea I am noting here is that the .com bubble did not so much burst as it got transferred into housing.
Present Day - The Bubble Flow of Energy
So this leads us to the present day where investors are seeking to unload profits, and pension plan/mutual funds planners are again seeking “safer investments” after recoiling from the most recent “burst” bubble. What asset can be safer than house? Apparently that answer is commodities. They are safer than MBS, and sky’s the limit on their new growth potential (this appears to be the currently accepted mantra in-spite of the Tulip Mania of 1636). I feel this is where much of our recent energy and commodity price spikes are coming from – especially in the case of oil (I think food prices have a host of interconnected causes in my mind which include the cost of oil as a driving factor as well as meat and ethanol consumption). Investors are now moving bubble assets into oil companies as well as the commodities themselves. The record price growth has very little to do with any hard numbers, and a lot to do with available monies (and of course the ever present fear of some sort of future shortages).
Prediction
So now that I have provided sufficient foreplay with the history of these bubbles and the concepts of timing and flowing bubbles here is my current prediction and dilemma. Oil prices will fall 60-70% to approximately $50 a barrel and average petrol prices will be approximately $2.00 a gallon in the U.S. I am basing this upon the fact that I feel the current ludicrous jump from $65 a barrel in 2007 to $140 a barrel is based upon this bubble flow described above. Furthermore I had said that $65 a barrel was high last year and have felt for the last 3 years that oil prices were too high. I still feel this is the case based upon the relatively unchanged fundamentals. I felt this exaggeration of price prior to the bubble flow was caused by fears of China and India’s continued double digit GDP growth powered on oil. I feel this fear is unwarranted as this growth rate is excessive and these economies will eventually overheat and lower their demand of oil. This is what I believe will account for the additional portion of the fall from $140 a barrel to sub $65.
However, this prediction is all fine and good if I am right but my issue again is timing. How will I be able to take advantage of this fall when I have limited resources and I have little to no idea on how long the bubble will last?
Flowing to the Next Bubble
My current thought is that if I am to make money I must embrace the concept of flowing bubbles and quit attempting to only predict the collapse of the current bubble. For example, instead of saying we should buy puts on Yahoo! I should have considered buying real estate to take advantage of the next bubble. Or instead of sitting in my apartment bitching, I should have bought shares of ExxonMobil. The benefit of playing the next bubble seems apparent: it is much cheaper to hold a long position in the next bubble for many years than it is to guess the timing of falls. However, predicting the next bubble is obviously much harder than seeing fundamental weakness in a current bubble.
In spite of this difficulty I am daring to venture a couple of guesses on where bubble money may flow next…and thus I am currently considering investing in:
Medical Device Industry – Healthcare in general seems to be a probable bubble movement as the healthcare industry starts enjoying major revenue boosts through the retiring of the baby boomers (who many of which are maintaining much of their healthcare benefits into retirement).
The Medical Device sector of healthcare I think is especially interesting because it has many of the same fundamental benefits as the pharmaceutical industry (e.g. long patent life, separation of actual price from the copaying consumer, etc.) without the negativity of an easily internationally duplicated product and an increasingly hostile domestic government that the pharmaceutical industry has.
I have specifically considered buying an Exchange Traded Fund (ETF) that contains multiple medical device companies. I feel this would successfully limit the major risk in the medical device industry of lawsuits. These lawsuits generally come from consumers or other medical device companies for copyright infringement (in this latter scenario I would possibly own companies on both sides of the lawsuit). An ETF would obviously also as well as providing a general spread of other idiosyncratic risk. Specifically I have looked at purchasing trading symbol “IHI.”
Green Industry – This is actually the prediction of my wife, which I am stealing for here. She feels that the oil boom will lead more directly to green energy after the upcoming presidential elections. Government subsidies will start flowing to these industries as the government seeks to look proactive towards both higher fuel prices and climate change. This does seem like a good fit for the bubble flow and could be conceivably accessed through the use of one of the recently created green energy ETFs.
Conclusion
So I have gone on record with a couple of light predictions and have discussed my dilemma of timing and predicting “bubble bursts.” I hope you got through this all, and I will try to keep my future posts regarding predictions shorter and rely more heavily on providing responses to others’ questions of my logic.
