Time To Prepare for the Next Bubble?
NOVEMBER 27, 2009, 8:26 P.M. ET
By GREGORY ZUCKERMAN
WSJ
As low interest rates around the world help create potential bubbles in everything from stock markets in Brazil and China to pockets of real estate in Asia and Australia, it may be time to prepare for the next big, financial bubble.
But don't count on gold to keep your portfolio safe.
The yellow metal once was a haven for investors, one that was sure to rise in times of trouble. It's now being scooped up by those, like hedge-fund manager John Paulson, who are convinced that major currencies, such as the U.S. dollar, will lose value as governments shovel money at various problems and expand the money supply.
The argument has virtue, and gold has been rising as the dollar weakens. But gold no longer automatically climbs in price during times of trouble. Often, in actually tumbles.
On Friday, gold dropped about 1%, even as global markets wobbled on concern that Dubai is having difficulty handling its debt load. During some periods in late 2008, as financial markets tumbled, gold also fell, as investors raced to sell every investment in their portfolio, even gold.
Protection for the next bubble will have to be found elsewhere.
On the heels of the tumble in markets in 2008, most experts predicted it would be many years before investors would have to worry about the painful bursting of another bubble. Some academics argue that financial markets are becoming more efficient, further reducing any potential danger.
John Paulson ignored similar advice to pull off the greatest trade in financial history.
Mr. Paulson and a band of unlikely investors, anticipated the collapse of the housing market and the resulting sell-off in stock prices by bucking this conventional wisdom. There's reason to think investors should learn from their methods.
John Paulson and a band of investors, the subject of "The Greatest Trade Ever," anticipated the housing collapse; investors can learn from their methods.
For one thing, a rash of financial bubbles in recent years -- including housing, energy, technology and Asian currencies – suggests that markets are becoming harder to navigate, and are more prone to overshooting. Veteran investor Jeremy Grantham has identified 28 bubbles in various global markets since 1920.
Investors of all sizes read the same articles, watch the same business-television programs, and chase the same hot tips, pushing them skyward. They then head for the exits at the same time, leading to heavy losses. There also are more ways to lay bets. Exchange-traded funds, for example, have enabled even individual investors to make big wagers on almost any slice of the stock, commodity, debt and currency markets.
The appetite to lend likely has been sated for a while, but it won't be long before bankers convince themselves of the next easy way to score sure profits. Low interest rates -- as exist today -- tend to fuel this boom-and-bust dynamic. That may be one reason why emerging-market nations like Brazil are seeing an eye-popping surge, and some real estate markets are soaring.
So what should investors do?
Financial pros abhor buying insurance on their portfolios because the cost could allow a competitor to score better returns. But individuals needn't worry about losing a few percentage points a year in returns if it means building a safety-net for a portfolio. Mr. Paulson purchased credit-defaults swaps, which serve as insurance on debt, rising in value when the debt falls. Most individuals aren't allowed to buy this derivative investment.
But out-of-the-money 'put' contracts, or options that pay off only if the market tumbles, often trade at inexpensive levels and are a boon in market tumbles. And a variety of exchange-traded funds have been introduced that rise when markets fall, making it easier for investors to buy some safety.
Have an exit strategy ready, along with some extra cash to cushion any tumble.
Mr. Zuckerman is the author of "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History."
http://online.wsj.com/article/SB125935147667266803.html?mod=WSJ_hpp_sections_personalfinance
NOVEMBER 27, 2009, 8:26 P.M. ET
By GREGORY ZUCKERMAN
WSJ
As low interest rates around the world help create potential bubbles in everything from stock markets in Brazil and China to pockets of real estate in Asia and Australia, it may be time to prepare for the next big, financial bubble.
But don't count on gold to keep your portfolio safe.
The yellow metal once was a haven for investors, one that was sure to rise in times of trouble. It's now being scooped up by those, like hedge-fund manager John Paulson, who are convinced that major currencies, such as the U.S. dollar, will lose value as governments shovel money at various problems and expand the money supply.
The argument has virtue, and gold has been rising as the dollar weakens. But gold no longer automatically climbs in price during times of trouble. Often, in actually tumbles.
On Friday, gold dropped about 1%, even as global markets wobbled on concern that Dubai is having difficulty handling its debt load. During some periods in late 2008, as financial markets tumbled, gold also fell, as investors raced to sell every investment in their portfolio, even gold.
Protection for the next bubble will have to be found elsewhere.
On the heels of the tumble in markets in 2008, most experts predicted it would be many years before investors would have to worry about the painful bursting of another bubble. Some academics argue that financial markets are becoming more efficient, further reducing any potential danger.
John Paulson ignored similar advice to pull off the greatest trade in financial history.
Mr. Paulson and a band of unlikely investors, anticipated the collapse of the housing market and the resulting sell-off in stock prices by bucking this conventional wisdom. There's reason to think investors should learn from their methods.
John Paulson and a band of investors, the subject of "The Greatest Trade Ever," anticipated the housing collapse; investors can learn from their methods.
For one thing, a rash of financial bubbles in recent years -- including housing, energy, technology and Asian currencies – suggests that markets are becoming harder to navigate, and are more prone to overshooting. Veteran investor Jeremy Grantham has identified 28 bubbles in various global markets since 1920.
Investors of all sizes read the same articles, watch the same business-television programs, and chase the same hot tips, pushing them skyward. They then head for the exits at the same time, leading to heavy losses. There also are more ways to lay bets. Exchange-traded funds, for example, have enabled even individual investors to make big wagers on almost any slice of the stock, commodity, debt and currency markets.
The appetite to lend likely has been sated for a while, but it won't be long before bankers convince themselves of the next easy way to score sure profits. Low interest rates -- as exist today -- tend to fuel this boom-and-bust dynamic. That may be one reason why emerging-market nations like Brazil are seeing an eye-popping surge, and some real estate markets are soaring.
So what should investors do?
Financial pros abhor buying insurance on their portfolios because the cost could allow a competitor to score better returns. But individuals needn't worry about losing a few percentage points a year in returns if it means building a safety-net for a portfolio. Mr. Paulson purchased credit-defaults swaps, which serve as insurance on debt, rising in value when the debt falls. Most individuals aren't allowed to buy this derivative investment.
But out-of-the-money 'put' contracts, or options that pay off only if the market tumbles, often trade at inexpensive levels and are a boon in market tumbles. And a variety of exchange-traded funds have been introduced that rise when markets fall, making it easier for investors to buy some safety.
Have an exit strategy ready, along with some extra cash to cushion any tumble.
Mr. Zuckerman is the author of "The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History."
http://online.wsj.com/article/SB125935147667266803.html?mod=WSJ_hpp_sections_personalfinance
