It is interesting if not a little disconcerting to see the way investment capital has moved around sectors in the last 10 years creating both opportunity and a mess to clean up.
The accumulation of individuals and firms is always seeking a return as both a source of income and a hedge against inflation or price level changes. That means stowing money in the mattress is not an option very many people take. As investments are made in stocks or land or other instruments, the money is available to create value, build new business and stoke innovation.
Problems arise as the competitive nature of investors coupled with the near instaneous availability of information via broadband unleash an ever increasing search for higher returns even when they have to be created by ever more risky ventures or enablers to investment (such as the zero down, interest only mortgages of the housing bubble).
If you trace the flight of capital from one sector to the next you can see this pattern. Begining with the so-called "dot com" bubble of the late 1990's which offered seemingly ever increasing speculative returns for the unending cost reduction and low cost business (sales and market) facilitation available through broadband applications. If you remember, a revenue model wasn't necessary toward the end because the strategy was to come into virgin territory and take the entire playing field first with massive investment and deployment of the application (whatever it was). Once you had a near monopoly and were delivering value you could then think about how to recoup the initial investment and establish ongoing cashflow.
When that came to an end, money fled the tech stocks and was searching for the next round of high returns. The tragic events of September 11 and the rank uncertainty of follow-on attacks on business and infrastructure sent money fleeing from stocks to hard assets, primarily land. Land values in almost every area of this country went on a tear as money flooded in as both a safe haven and to capture the speculative return that the massive nature of the investments provided in rapidly rising land prices. Along with this came the housing and building boom as a natural land development strategy.
As more and more money poured in, demand under normal terms became saturated so an ever increasing pool of buyers was created with an ever increasing innovation in mortgage instruments. No money down, interest only payments, no credit check terms etc. widened the field of buyers substantially and allowed normally qualified buyers the ability to buy larger homes and more expensive homes than their income under traditional payback terms would allow. Speculators filled the buying ranks and depleted available stocks with the hope of flipping them in a year for huge profits. This of course fueled the bubble until mortgage foreclosures began to overwhelm the process. That happened when creative and especially adjustable mortgage terms began changing and increasing monthly payment terms. The subprime mess is still unwinding as you know.
Once no one wanted to put another dime in mortgage backed securities, capital needed another safehaven and the global growth led by China, India and the emerging nations provided fertile ground. A normal and real increase in commodity demand necessary to build and feed an emerging nation as well as satisfy its growing internal demands as a middle class began to emerge, provided the returns which initally attracked capital fleeing housing market investments.
We now are approaching the early-mature portion of the commodity bubble. When I see forecasters talking about $200 to $500/barrel oil, I know the end is at least in sight. This talk is equivalent to zero down mortgages and signals the last gasp of the sucker money (the last one in and the first one to lose). No one can explain the huge risk premium that is now incorporated into most commodities. You can explain some of it with market fundamentals and the weaker dollar but that gets to about half of the run up.
For this reason, I expect oil prices and the prices of most other commodities to soon begin to waver and then retrace their gains of the last year fairly dramatically. Subsidy elimination by China and the rising inflation in the global growth countries will begin to put the brakes on future demand.
What is the next sector to attract money fleeing commodities? I am guessing stocks again but which sector will it be? I wish I knew (probably alternative energy stocks) but we will have to get through the subprime mess so that capital is available to fuel business growth again.
