The Next Bubble: It's Already Underway

December 20, 2008


President-elect Barack Obama made it clear that his solution for turning around a stagnant economy is the "largest single investment in our national infrastructure since the creation of the federal highway system."

He and advisers are assembling an astounding $850 B stimulus plan including tax breaks and money directed at huge alternative energy projects.

In a May 2008 commentary entitled, "The 'R' Word" we suggested that the US was in desperate need of investment in infrastructure and that it would create the next wave of economic expansion. Now it's finally a reality.

The cornerstone to any major period of economic expansion is inflation. The next bubble will be fueled by the trillions of dollars that central banks are currently injecting into our financial system.

Whenever there is significant inflation, or a trend of dollar depreciation, we experience economic growth and development. When in periods of deflation, like the short term period from August to November, we experience economic contraction.

Yes, the next bubble is beginning to expand because more money is entering world markets. In spite of the over-reliance on credit--loans and inflationary monetary instruments-- we think periods of expansion are very beneficial to society. Barrack Obama's investment plan will bring necessary modernization to the country's aging infrastructure.

Similarly, FDR's new deal improved the quality of living for most Americans and modernized the country with additional infrastructure. In the 1950's the federal highway system eased congestion and made travel quicker and easier for all. More recently, the tech bubble created the interconnected and technologically advanced web-based world in which we presently live--and we certainly couldn't imagine living without it.

Nonetheless, living in periods of economic expansion means you must invest wisely in order for your money to grow. You can beat inflation through sound investments in gold and silver coins at the end of deflationary periods (NOW). The price of gold has shown signs of reversing from its previous short-term downtrend (see chart below). Both precious metals and quality mining stocks are on the verge of a major bull run that will run its course throughout the better part of 2009.