Bubbles in Bubbles? (and other Questions for 2006)

2005 was an amazing year for me, challenges I could have never imagined at the beginning of the year, and accomplishments that seemed far off.

So now, ten days into the new year I am ready to tackle 2006, I don't want to make a bunch of shoot from the hip predictions about what will or won't happen in the next 365 days, (S&P 500 will be at 1403 on December 31, 2006 bet on it). Instead here are 3 questions that will have a big impact during 2006.

1. Is there a Bubble in Bubbles?

The housing bubble, interest rate bubble, China bubble, Dollar bubble, Oil bubble, Gold bubble, Google bubble, Blog bubble, yikes! I know a lot of writers really blew it in 2000, they failed to call the "Great" stock market bubble or dot-com bubble, but I think we are seeing a massive case of once bitten twice shy causing writers to see bubbles everywhere.

If you wanted to avoid all of these supposed bubbles you would have to sell your house, your stocks, your bonds, your gold, your bonds, your cash, and siphon the gas out of your gas tank and sell it. Just to be safe, you should also turn on your faucet and sell all the water that comes out of it, because water will soon be a scarce resource and the price will go up, if there is anyone left to drink it after we all die from the flu.

Are any of these things really bubbles, or have the prices just gone up? That is a good question, I will tentatively bet against any of them being a true bubble.

I am not an efficient markets disciple, I believe that prices can get way out of line when fear or greed run rampant. While I see a lot of greed in these markets, I also see a lot of fear to balance it.

Housing, for example, has been a "bubble" for a long time, could prices decline, sure and I think there is a good chance they will, but this is very different from the stock market in 2000. In 2000 bears were hard to find, obviously a very different situation from real estate today. Post 2000 there is a booming market in crash prediction. So while I wouldn't be surprised to see a decline in some or all of them, I will be very surprised if real estate, gold, or oil are 25% below today's prices a year from now.

2. Great Plains or Mountain Range?

Is the world going to be flat? Tom Friedman says yes in one of the best books of 2005 The World is Flat (which I got two copies of this Christmas). While I'm absolutely sure that Friedman is right on the global scale, on more micro scale, I'm not so sure.

As I finish my MBA I see a lot of my fellow students moving to big financial and creative centers like New York and Chicago. It makes me wonder if we are moving towards a do anything, anywhere via the internet world that many people see, or towards a world of super cities that draw in brain power from smaller cities to create financial, creative and research centers, leaving little high value work in other cities.

Even Friedman's book he spends a lot of time discussing how new global companies like Infosys and Microsoft have built big campuses in cities like Mumbai. They aren't looking for one programmer in rural India who can work from his bed room via the internet, or even one guy in Milwaukee who can work from home via the internet, they are interested in being a part of cities built around knowledge that can draw in growing pools of highly educated talent.

I think this is a bigger question than most people realize, especially for leaders of mid sized cities and states. In my job search I investigated great jobs in a variety of cities and realized I wouldn't move to a lot of mid sized cities. I would really only want to move to about 10 cities in the U.S., big global cities like New York, Boston, San Francisco, or places like Austin or Madison that have thriving academic and creative economies built around world class universities.

This is the challenge facing all but a handful of cities in the world, no just in the US, but in the world. Is it hard for you to imagine almost a big chunk of the high value added work in your city leaving in the next ten years? Migrating to another great city? I didn't think so. Unfortunately I don't see a lot of leaders who are really engaged in dealing with the issue at hand.

The challenge is to develop the kind of creative, academic, financial and entrepreneurial synergies that build great cities. I think this s one of the truly big questions facing most cities and state over the next twenty five years.

3. Which Way Will the U.S Tip?

The challenges facing the US are well know: massive trade deficits, massive budget deficits, cheap foreign labor, schools that can't keep up with our foreign rivals, and huge future liabilities resulting from the burden of caring for our aging population.

In the short term the consequences seem ominous, a weakening dollar causing increasing inflation and an erosion of real wealth in the US.

But the bigger question is: is this the beginning of the American decline?

Most Americans don't seriously think about how other major powers have fallen. The concept of Rome falling was unthinkable at one point, and the British certainly didn't plan for their empire to disappear as quickly as it did.

While I am certainly not a bear on the US, I think the issue deserves more serious discussion than it is getting today.

The values the US was built on are important to consider: education, hard work, thrift. It is also important to consider the value we place on those fundamental building blocks of a great nation.

There is no nation better equipped to win in the future than the US. Our rule of law, respect for personal property, and flexible capital markets position the US to adapt to major changes.

However, today our nation faces serious competition from all corners of the globe as well as serious home grown challenges. Unfortunately some people propose solutions that eat away at the foundation of our nation. In response to the challenge of rising Chinese economic power some leader, notably Democrat Chuck Schumer have proposed protectionist trade tariffs, in response to domestic challenges many people have proposed growing the government, in response to poor academic performance some people have proposed that we stop rigorous testing, in response to slow wage growth many Americans have taken on record levels of personal debt to support more and more spending.

While these measures provide temporary relief, they cause long term weakness. Our nation's future won't be decided in 2006, but the 2006 elections will help determine which direction our nation heads.

I don't think any of these three questions are easy to answer, and I don't think any will really be answered during 2006, but I think they are a good place to start when thinking about investing and politics during 2006.

Timothy Burger
timothyb(at)timothyburger.com