Forget the tech bubble and the property bubble – now we have a government bubble

Hedge fund manager Crispin Odey of Odey Asset Management is worth listening to. He's one of the few investors who managed to make money from both the crash and the rebound, shorting banks all the way down, then buying them all the way back up. So what's he saying now?

Hedge fund manager Crispin Odey of Odey Asset Management is worth listening to. He's one of the few investors who managed to make money from both the crash and the rebound, shorting banks all the way down, then buying them all the way back up. So what's he saying now?

The big news is we're back in bubble territory. "Markets are now entering a bubble phase," says Odey. This may last "until the end of the year," he reckons. The bubble has been pumped up by the Bank of England's quantitative easing (QE, or 'money printing'). As a result, "individuals and institutions are stampeding into real assets eager to have anything but cash or government bonds... The latter are expensive because of the QE."

So what should investors do? "At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG [Her Majesty's Government] and everyone should enjoy it."

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We agree with him on the bubble point we reached much the same conclusion in yesterday's Money Morning, in fact.The stock market rally is just another bubble and it's set to pop. But the trouble with buying into bubbles is that you never know when they're going to pop. Everyone thinks they can make a quick profit then get out on the back of some "greater fool" getting in. But what usually happens is that everyone ends up running for the exit at the same time.

Our preference would still be to stick with the defensive stocks that have been left behind in the 'dash for trash'. You get a decent dividend yield and you don't have to worry about watching every utterance from Mervyn King for hints that QE might be about to end.

But if you do fancy a punt on the broader market, I was speaking to Robin Griffiths, a highly respected technical analyst with Cazenove Capital yesterday. He reckons there'll be a 10% correction in mid-to-late October which would provide a short-term buying opportunity. But keep your eyes open Griffiths expects another sell-off around spring 2010, after which everything "could come undone".

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.