The real estate bubble left a mark on all sectors of the economy when it burst. If economists are to be believed, we are again seeing the formation of some serious market bubbles. Here are some economic bubbles, which I believe could burst in the near future.
Of late, people have been going gaga over gold. News about the increasing prices of gold have been splashed across popular newspapers and magazines. I think this hype about gold is just like any other bubble. The craze over gold is driving more and more people to invest in it, which is pushing the price up. When institutional investors start pulling their money out, this bubble is going to burst. Average investors will suffer when gold price comes crashing down.
Another craze among investors is buying stocks of companies from emerging markets. The emerging markets have proved to be a good investment so far. Companies in these markets have progressed rapidly because of huge consumer bases, their growing economy and low cost of inputs.
It might seem that emerging markets will continue to prosper, but they appear to be afflicted with some economic problems. Both India and China are being hit by inflation. Moreover, recent labor law reforms in India might drive up the costs of inputs. With these problems in sight, it would not be wrong to assume that this huge bubble of emerging market stocks could burst soon.
We are also seeing the formation of echo bubbles – small bubbles that often appear after the bursting of a huge bubble. The reason is the influx of cash by the government to keep the economy afloat, leading to a rise in prices of several assets, which draws speculators to the market.
There is strong evidence that these bubbles are forming in the commodities market, with prices of many commodities increasing sharply. Oil and copper have seen spectacular rallies since the economy started recovering. This increase in prices is not supported by any economic reasons, as a large percentage of people are still unemployed, and savings and income continue to be low.
The only reason for formation of these bubbles is that there is a lot of money circulating in the economy. The low interest rates offered by traditional investments are driving people towards riskier alternatives. The bubbles in gold and emerging market stocks are perfect examples of this.