Economists See 1-in-3 Chance of Another Bubble
Emerging markets and commodities are the most likely places for another bubble to develop, according to economists in the latest Journal survey, but they only put slightly better than 1-in-3 odds of such an unsustainable run-up in asset prices occurring in the next two years.
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| Bubbles of the asset variety are much harder to spot. (Getty Images) |
“Asset prices rising from extreme lows don’t suggest a bubble,” said Allen Sinai of Decision Economics. “Asset prices, real estate and stocks collapsed. Returning to normal would be a big price appreciation.”
Twenty respondents said commodities posed the biggest risk of another bubble, while 24 chose emerging markets — 13 pointed to equities in those nations and 11 said real estate was the most likely risk. Treasurys, high-yield bonds and U.S. equities were the top choices of less than five economists each.
Though the economists put odds of another bubble in the next 24 months at 36% on average, there was a wide variance of opinion, ranging from 0% to 100%. Even among economists who saw better than even chances, there was no clear agreement on where a bubble would materialize.
Twenty respondents said commodities posed the biggest risk, while 24 chose emerging markets — 13 pointed to equities in those nations and 11 said real estate was the most likely risk. Treasurys, high-yield bonds and U.S. equities were the top choices of less than five economists each.
One of the most troublesome things about bubbles is identifying them while they are still inflating, or even when they are about to pop. In a 2006 Journal survey, 20 out of 44 economists were expecting home prices to rise in 2007 and the majority said that the worst of a slowdown in the housing market had passed. House prices, as measured by the Federal Housing Finance Agency, posted a 0.9% drop in 2007 and a further 8.3% decline last year.
But even if another bubble develops, some are confident it doesn’t have to produce the degree of pain caused by the bursting of the credit bubble. “Another bubble is inevitable,” said Diane Swonk of Mesirow Financial. “Hoarding is a part of human nature. Without the support of leverage that we saw earlier in the decade, however, its consequences should be much more manageable.”
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