A year on...what bubbles loom?

This week marks the one year anniversary of the collapse of Lehman Brothers...the event that truly kicked off last year's financial crisis. Some experts have called the crisis the result of a bubble in the housing market (which fueled the creation of highly complex and opaque financial derivitives). Earlier in the year I wrote a piece comparing this bubble to the tech bubble at the start of this decade, but what are some other potential areas of "irrational exuberance" to watch for the future?



Commodities--The tangibles market has been seen as a safe haven over the past few years. As a result gold prices have kept increasing. This year marks 7 straight where we have seen an increase in price per ounce. There is some question as to whether a bubble is being fueled. Demand remains high. But predictions of a doubling of its current price are probably way off. Many thought real estate would continue its 10+% annual growth...No asset class rises forever without a pull back.



Emerging Markets--China and other Asian economies have been leading the global economy out of recession quicker than the developed world. This has sparked the decoupling debate and it has been suggested by some that emerging markets are uncorrelated to the developed world's economies. Others fear of a "smoke-and-mirrors" economy fueled by emerging countries' governments. Ultimately, the business in emerging markets need to be measured by the same fundamentals as the developed world's.



The Fed--Simply because the Fed is buying bad debt (or martgage-backed securities), does not mean those securities should no longer be worrisome to the rest of us. By trying to control the damage inflicted by the financial crisis, the Fed could be silently passing along the problem to taxpayers. $1 1/4 trillion dollars of bad assets may create a debt bubble that wil be difficult to crawl out of. If taxes are raised to cover bad assets, it could mean less total return on investments. If the dollar is devalued as a result of the Fed taking on so much bad debt, assets will simply be worth less.



Keeping an eye on these macro trends and others is important in developing your investment strategies going forward.

Sunshine Tax Increasing?

Why is it that each year (especially so in recent years), the legilators in Sacramento are called to fit a square peg into a round hole? How are tax estimates so far off when it comes to putting a state budget together. This year could be rationalized by the depth of the recession we are in/coming out of, but it could also be a sign that tax revenues have become more volatile.

• Housing prices have severely fluctuated in California over the past few years


• The psychological effect of "big housing wealth" in the earlier part of this decade encouraged homeowners to borrow and spend, thus increasing sales tax revenues. Quite the opposite now.


• How will high a high unemployment rate affect tax revenues for next year budget process?

To combat tax volatility and to continue to pay for government services, expect both state and federal governments to look for new "things" to tax. With greater corporate & workforce mobility, state competition could lure business away from the state. A fine line for the California tax man to walk...