3 Investment Bubbles That Could Burst In 2010

Investment Bubble #1 – The China Bubble

I have trouble listening to the blow-dried experts on CNBC whose substantive knowledge of China runs about as deep as the menu at the local Chinese carry-out. It's hard to imagine that they do even the most basic due diligence and read the internal Chinese newspapers, talk to Chinese business people and to the American business people who live and work in China.

Rather, the talking heads appear to rely on the word of Chinese political leaders who incarcerate dissenters, threaten Taiwan and otherwise never make a promise they aren't more than happy to break.

The Chinese markets are being fueled by massive bank lending (at the direction of the state) that is building unused and unneeded factories. One example is the 40% to 60% of extra steel capacity that is simply underutilized. When the Chinese financial house of cards collapses, its markets will be a hellacious mess — and, mark my words that it will collapse when the Chinese authorities run out of money or decide asset inflation is becoming too big a threat to social stability.

What will China take with it when its economy collapses?

Investment Bubble #2 – The Commodities Bubble

When China collapses, commodities will collapse. The country is already importing more of everything it anticipates needing in the event of a commodity collapse — all in anticipation of inflation. That includes copper, iron ore, molybdenum and more.

Commodity stockpiles are growing, and commodity prices are rising, leading to still-higher demand for raw materials in anticipation of higher prices. And, it's all fueled by the massive credit being doled out by the Chinese banks.

There will very likely come a day next year when the music will stop. The growing stockpiles will become too massive and, boom, the commodity merry-go-round will end very badly. For now, the tape is on China's side, and the country is a long trade if you pay close attention to its market. A year from now, however, China will be a short-side trade after it blows.

Investment Bubble #3 - Precious Metals

One scenario for precious metals is that when industrial commodities blow, they will take precious metals with them. The contrarian view is that the commodities bubble will blow when the dollar begins rising, due to technical momentum or a change in interest-rate policy by the Fed — something that won't occur until 2011.

Gold is a great long trade but driven purely by momentum. No one with any experience in the real world (so that excludes most monetarist economists) is expecting any serious inflation. The velocity of money continues to be negative and gold will simply stop going up — barring geopolitical issues — once the Fed takes its foot of the liquidity pump. That's something that's likely to happen sometime near the end of 2011.