The worst of the financial market has passed and it seems we're in a bull market now. As we know, each market cycle needs something that can carry our investment to a higher level, to an extremely high level, and then to the cliff. This something is usually called a bubble.
A bubble is not totally a bad thing. You just need to jump on it early, and then jump off it before losing your head with others when it's dangerously big. Sure it's a risky thing to do but boy risk is what investors swallow to pursue the wealth. So let's guess what the next bubble that we can ride on is.
The way to guess is usually first gathering all the candidates we can think of and then checking each of them using some criteria. Personally, I have the following three criteria to find a bubble.
(1) First, size. The industry or asset market should be big enough to accommodate the general public's huge interest/investment money;
(2) Second, novelty. It shouldn't be the bubble in last cycle(s) so it is not associated with bad memories;
(3) Third, confidence. There must be seemingly obvious reasons to generate strong confidence in the general public for this industry or asset in question. It will finally make the general public so confident in it that they won't believe this industry or asset market would ever decline. Think about the theory that dot com industry has completely changed our economy and removed the root for recessions. And ask yourself if you believe the housing price would ever fall in year 2006.
Now let me present a few candidates, (a) housing, (b) high tech, (c) green/alternative energy, (d) bio tech, and (e) the US Dollar. Now let's sift them through my criteria.
Housing and high tech fit the size and confidence criterion but not the novelty criterion. Green/alternative energy and bio tech satisfy the novelty and confidence criterion but not the size criterion, at least in the near future. The only candidate left, the US Dollar, seems to fit all of my criteria. I will examine it more carefully below.
Let's consider the size first. What else can have a capacity comparable to the previous bubbles such as dot com and the housing market? Also, do we notice that the size of the later bubble (the housing market) is a lot bigger than the earlier bubble (the high tech)? The US Dollar, representing the US economy and political power, is much bigger than the previous two.
Second let’s check novelty. The US Dollar was not the bubble in last two economic cycles. It even got depreciated in the last cycle. So the Dollar is a new topic. No recent pain is associated with it. And it's not inflated yet and has potential to rise.
Third let’s check the most important thing for a bubble, confidence. Is it possible for investors all over the world to have high confidence in the US Dollar? How about the huge amount of Dollar bills the Fed has put into the market?
The answer to these questions is China. Just imagine for a minute now, what will happen if China falls apart overnight? Will that make dollar the strongest currency overnight? With no doubt, the answer is yes. Other concerns will simply go away if China, the major challenger of the US, falls apart.
Ok, I don't believe the China economy will fall apart in near future, but I do think it will dip due to its huge bubble in the housing market. That bubble will inevitably burst in the near future, maybe one year later. And that will depress China’s economy really hard, for at least two years just as what happened in the US. The dip of China will present a great opportunity for the US economy, and the US Dollar, to shine. Being in a better shape comparing to China, the assumed next NO 1, will prove to the general public that the assumption is just not true and the US should be the NO 1 forever. This would push the dollar to the extreme. Of course finally the Chinese economy will manage to recover and prick the bubble of the Dollar.
Here are some additional supports for a rising Dollar. First, the interest rate is zero now and can only go higher which will in turn push dollar higher. Second, the economies of Europe and Japan are still weak, and will compare weaker to the US economy in the coming years. So dollar will appreciate against Euro. As a result countries like China and Japan will buy more dollar than Euro, push dollar even higher. Third, China's domestic consumption will remain weak and has to rely on export and won't allow its currency to rise against the Dollar even with the pressure from the US.
I'm not an economist. I only do stocks from time to time. What I wrote here is not based on complicated statistic data. It's based on just the most obvious facts, with good reasoning and imagination. And if you agree with me you should start betting you money on this bubble now, when it's still in its stealth stage and the stakes are cheap. You can bet in the currency exchange market but that's not the only place. You can also bet in the stock market, on companies that will benefit from a strong Dollar, such as importers, retailers, transportation/railroad companies, etc. Beyond investment, buy stocks or not, Americans will enjoy another wave of cheap Chinese products.
