Speculation in the market

This is not something new, but its worth to mention.

If we go back in 2000, there was a speculation in the Stock Market, and bubble were created what we called dot com bubble. The market capital of the companies, which did not make profit was in billions. NASDAQ stock index soar from 1500 to 5000 in 2 years. When the market crashed, Fed Reserve rescued companies by cutting the borrowing cost and reduce the interest rate to 1% (retiree get hurt oouch). Now NASDAQ is half way to that top.

There was a another bubble during the same time, energy bubble, where the prices of the electric city and gas was artificially inflated by Enron. Which eventually burst.

Because the interest rate was too low in 2003-4, that enable housing boom, and house price start to soar, many houses increase its value to 70-80% in this years. Lot of speculator (Banks, Loan Agents, etc) jumped into market. Consumer use their equity as credit card and use the money to spend. Now we see the housing prices are going down as much as 30% and that created another problem called Credit Crunch in the financial industry. Many hedge fund and mortgage company are bankrupt.

In late 2006, when housing price goes down, it create another bubble. This bubble is in the commodity market.

In this bubble,
Crude oil soar from $50/barrel in Jan 2007 to now $118, whopping 150%
Wheat prices jumped 130% since March 2007.
Rice prices jumped 140% since Jan 2008
Soy prices jumped 80% since 2007.
Coal price is almost double since 2005.
Gold price rose 90% in a year.


Not to mention the speculation in the currency market, as US Dollar drop 20% in last 18 months. It never happened before.

The number one reason for each of this bubble in past decade is Speculation. The speculation is easy to implement, especially when the trading market is computerized. (Thanks to Enron who found the idea of selling the contract through electronic exchange).

Other reason is Media, they too much spread the negative news. Like house prices going down, rice price going up and so forth.

I personally believe the reason is Globalization, Open Market and De-regulated System in the United States. The country like China (Totally Regulated and Close Market) get benefit out of this.

Even though we go through this bubble and burst, the S&P 500, which is US broad based index, has return just 1% in last 10 years. So if you have put the money in S&P 500 in 1998, than you just get 1%. Check this WSJ article.