The other watch-list item is the fact that with the cessation of the Fed’s QE2 program the scrutiny will become very intense on the US central bank’s monetary policy going into the second half of 2011. While many other central banks around the world have already embarked on the path to tightening, the Fed has remained in an accommodative stance thus far. Much of what the greenback does or does not do following the advent of the year’s second half depends precisely on what the Fed might or might not do policy-wise. Either way, we have another pivot-point in the making.
The long weekend gave the opportunity for some financially-oriented bloggers to reexamine the idea of bubbles and what makes them tick. Fundweb’s Vanessa Drucker made just such observations in a piece titled “Fizzy Assets” and dissected the dynamics of these spherical weapons of wealth destruction (that is, when they implode). Ms. Drucker opines that the “key” narrative which enables a bubble to expand may take various forms. These may range from a scare (such as the one that says that the world is on a Malthusian path of peak oil or agricultural products) to a promise of salvation (the dollar and other fiat currencies are doomed, so only hard assets like gold will retain value) to a “seductive” or “New Era” declaration (like the one that saw the Internet as a paradigm shift of “immeasurable proportions”).
Three investment and psychologically-based fallacies play into this sad reality: The “hot-hand” belief that a trend is endless, the aversion to losses and loss of social status by not participating in a “hot asset” and the leanings towards confirmation bias. That is when any information that contradicts one’s world view is overlooked, or ridiculed. Finally, no one should ignore the damaging role that being overconfident can play in remaining in a bubble far longer than is safe. One suggestion that, for example, Max Dufour (Sungard Global Services) offers is for investors to consider setting “stops” at about 7% under the level at which they enter a hot market in order to avoid the possible wipeouts that will most certainly affect others when things deflate.
Until tomorrow, gamble with…care.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America