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People frequently ask where the next big speculative bubble is likely
to be.
Will it be in housing again? Will it be in the stock market?
It is impossible for anyone to predict bubbles accurately. Bubbles are
social epidemics fostered by a sort of interpersonal
contagion. A bubble forms when the contagion rate
for ideas that support a bubble goes up.
Yet, contagion rates depend on patterns of thinking, which are
difficult to judge. Big speculative bubbles are rare
events. Little bubbles, in the price of, say,
individual stocks, happen all the time, and do not
qualify as an answer to the question.
Big bubbles last for many years, resulting in their prediction to imply
predicting many years into the future, which is a
bit like predicting who will be running the
government two elections from now.
However, some places are a little more likely than others to give rise
to bubbles.
The stock market is the first logical place to look, as it is a highly
leveraged investment and has a history of bubbles.
There have been three colossal stock market bubbles
over the past century: In the 1920s, the 1960s, and
the 1990s. By contrast, there has been only one such
bubble in the country’s housing market over the past
100 years, that of the 2000s.
In 2009, the US had a huge rebound from the bottom of the world’s stock
markets. The S&P 500 is up by 87pc in real terms
since March 9 of that year.
Yet, while the history of stock market prediction is littered with too
much failure to try to decide whether the bounce
back will continue much longer, it does not look
like a bubble but more like the end of a depression
scare.
Instead of a contagious “new era” story, the rise in equity prices has
come with a “sigh of relief” story.
Home prices have been booming in several places over the past year or
two, notably in China, Brazil, and Canada, and
prices could still be driven up in many other
places. Even so, another housing bubble is not
imminent in countries where one just burst.
Conservative government policies will probably
reduce housing subsidies and the mood in these
markets seems discouraging for a bubble.
A continuation of today’s commodity price boom appears more likely for
it has more of a “new era” story attached to it.
Increasing worries about global warming and its
effects on food prices or about the cold and snowy
winter in the northern hemisphere and its effects on
heating fuel prices are contagious stories.
They are even connected to the day’s top story, the revolutions in the
Middle East, which, according to some accounts, were
triggered by popular discontent over high food
prices, and which could themselves trigger further
increases in oil prices.
Nonetheless, a favoured dark horse candidate for the next decade or so
is farmland, and not just because there have been
stories of booming prices in the US and UK over
recent months.
Farmland is much less important than other speculative assets. US
farmland had a total value of 1.9 trillion dollars
in 2010, compared with 16.5 trillion dollars for the
stock market and 16.6 trillion dollars for the
housing market. Large-scale farmland bubbles are
rare: The entire 20th century gave rise to only one
in the US, during the great population scare of the
1970s.
Yet, at least in certain places, farmland seems to have the most
contagious “new era” story right now. It boomed in
the US recently, going up 74pc in real terms during
the decade ending with its price peak, in 2008. The
highly contagious global warming story paints a
scenario of food shortages and shifts in land values
in different parts of the world, which might give
investor interest an additional boost.
People imagine that the housing and farmland markets always move
together because prices in both boomed in recent
memory, but from 1911 to 2010 the correlation
between annual real growth of prices for homes and
farmland was only five per cent in the US. The
latest data on farm prices have not shown anything
like the decline in home prices.
By 2010, real farm prices in the US had fallen only five per cent from
their 2008 peak, compared to the 37pc decline in
real home prices since their peak, in 2006.
The housing price boom of the 2000s was little more than a construction
supply bottleneck, an inability to satisfy
investment demand fast enough, and was (or in some
places will be) eliminated with massive increases in
supply.
By contrast, there has been no increase in the supply of farmland, and
the stories that would support a contagion of
enthusiasm for it are in place, just as they were in
the 1970s when a similar food price scare generated
the century’s only farmland bubble.
The difficulty of forecasting bubbles must always be kept in mind. For
daring investors it is not enough to find a bubble
to pile into; they must also try to determine when
to cash out and put their money elsewhere.
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