First things first. Yesterday was the eight anniversary of September 11th, 2001. I want to extend my deepest sympathies to those who lost loved ones on that awful day.A lot has happened in the markets in the last eight years, but one thing remains constant, greed and fear. In my last post looking at whether the recovery will mirror the decline , I concluded that all the liquidity in the system will ensure another bubble and we all know that asset bubbles do not end well.But what are the bubbles in the making? Lawrence Delevingne reporting for the Business Insider blog recently wrote on Ten Bubbles in the Making

One year after America's brush with economic catastrophe, there's plenty of looking back at the bubbles that caused financial chaos. But what's next? There are surely dangerous economic bubbles forming as we speak. As Alan Greenspan warned this week, "They [financial crises] are all different, but they have one fundamental source," he said. "That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue." The trick, of course, is spotting them. By definition, most people don't spot a bubble before they form and burst. Here's 10 for which you should be on alert: 1. China bubble: Despite the weak global economy, the Chinese stock market has soared like crazy this year. But many believe the rally has been driven purely by government-supplied liquidity, rather than fundamentals. The fear is that companies are flush with cash, but have little "real" to do with the cash, so they're parking it in the stock market casino. The Chinese real estate market appears to be on a similar trajectory.

2. Green bubble: Green has been everywhere. With observers saying the "Age of Cleantech and Biotech" will be the next major economic revolution, and Washington pouring billions of dollars into alternative energy projects, you'd think a bubble would have already formed. But, as we noted this spring, it did not, at least from an investment perspective. Still, as the economic recovery takes shape, alternative energy could see excess investment on hopes of big future returns. There's plenty of hype left, and if investors regain the cash to get in the game, could green become the next internet or housing bubble?



3. Gold bubble: Gold prices just keep going up. They've risen for seven straight years, recently breaking $1,000 per ounce. Is it a bubble? Right now, it doesn't look too bad. Gold is good in both inflationary and deflationary periods, as it holds wealth tangibly. And, as the Telegraph notes, there's real demand, especially from China. But with some predicting a doubling of prices to $2,000 an ounce, too many people could jump in and spike the real value of the precious metal. The "rise forever" mentality usually means trouble. 4. Federal Reserve bubble: Is the Fed saving the financial system or creating another dangerous credit bubble by snapping up mortgage-backed securities? At first glance, the Fed's effort to clean up mortgage-backed securities is a winner. But, as Heidi Moore wrote for Slate's The Big Money, the Fed is actually creating a bubble similar to the one it's trying to do damage control on. By eagerly trying to save banks and stabilize the housing market, Washington is taking on too much: $1.25 trillion of mortgaged-backed securities, including both the original toxic assets and products of foreclosures to come. So who would bail the Fed out? You. 5. Trash stock bubble: There's a rush to trash going on. Stocks like Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even GM made big runs in August -- trading in trash financials made up nearly one-third of NYSE's August volume. So why are people buying junk? Charlie Gasparino says shares of junk financials -- companies like Fannie, Freddie, AIG, Citi and Bank of America -- are being pushed up by a short squeeze. The Wall Street Journal suspects its high frequency traders. And others say its retail speculation and day traders getting their way while Wall Street went on vacation. 6. Education bubble: More people are going back to college and taking on huge debt to do it, despite questions about what the degree is really worth. Last year, the amount borrowed by students and received by schools grew some 25% over the previous year, to $75.1 billion. That's a huge amount, especially with weak, low-paying job prospects for graduates in this economy. As we've noted, all this student loan debt is crazy. Despite the desire to see more subsidization of college, we suspect there will be a collapse in student loan debt availability and desire to take on new debt. Short of telling kids not to go to college, something's going to give. The pop may be starting already. As Bloomberg reports, as many as one-third of all private colleges surveyed said they expected enrollment to drop in the next academic year. And almost 40 percent of those colleges said some of their students dropped out due to personal economic reasons and a quarter said full-time attendees switched to part time. Half said families had to cut back their expected contributions as the value of college savings plans dropped 21 percent last year. 7. Subprime bubble, 2.0: What are banks doing with all those subprime mortgages? They're repackaging with a higher rating -- "re-securitization of real estate mortgage investment conduits" -- and selling them. As we've noted, it's a plan nearly identical to the complicated investment packages of the financial crisis a year ago. That being said, the problem was not strictly securitization, but the underlying housing bubble. So the return of complicated products isn't necessarily the end of the world. 8. Life insurance securitization bubble: In its search for new profits, Wall Street is planning on securitizing “life settlements" -- policies that the sick and elderly can sell for cash while they're alive -- much like it did subprime mortgages. The New York Times warns that we could be looking at subprime all over again. Maybe. As we've noted, it wasn't securitization that caused the financial meltdown. It was the bursting of the housing bubble. Yes, there was a feedback loop, whereby securitization allowed more money to flow towards housing, but it seems unlikely that "life settlements" would get big enough to infect all portions of the financial world. 9. Commercial real estate bubble: This bubble is already hissing, if not popping outright. While the economy is improving and some home sales are slowly coming back, the commercial real estate market could get far worse. As The New York Times reports, "Even though industry lobbyists were able to persuade Congress to extend a loan program aimed at prodding the stalled securitization market back to life, several analysts said it was unlikely to head off a spate of defaults, foreclosures and bankruptcies that could surpass the devastating real estate crash of the early 1990s." As UPI notes, commercial mortgage defaults could reach 4.1 percent by the end of the year, up from 2.25 percent in the first quarter, and Real Capital Analytics estimates commercial property loans worth $83 billion have been involved in default, foreclosure or bankruptcy in 2009. Badly hit will likely be malls. "The next financial tsunami to hit will be the widespread failure of shopping center mortgages," says Peter Monroe, co-chair of REOMAC, a not for profit trade association to CNBC. "Half a trillion dollars of commercial loans financed on historically low rates, are due for refinancing in the next three years," says Monroe. "The negative impact of these shopping center mortgages is enormous." 10. Emerging market bubble: It's not just China. Risk-tolerant investors are bidding up emerging market shares to valuations not seen in 9 years. With an average PE of 20x, they're not in bubble territory just yet, but watch for things to get out of hand.

Click here to view the 10 bubbles in the make slide show.

Some comments on these potential bubbles. Earlier this week I had my quarterly lunch with three astute investors. One of them remarked that he thinks gold might be the next bubble and now that Barrick Gold removed its hedges, he thinks it makes sense to buy a gold ETF like the SPDR Gold Shares (GLD).

As for other bubbles, some concern me more than others. The commercial real estate fiasco is driven by huge inflows of pension funds and wealth funds recklessly bidding up prices with no regard of the underlying value. Now after several years of nonsense, commercial real estate risks sinking pensions. Private equity is also at a breaking point and infrastructure is destined to be the next major asset bubble that pops.



Josh Rosner, managing director of Graham Fisher, was on Tech Ticker recently saying that we're not out of the woods yet:

Everybody, it seems, knows the banks face future losses from commercial real estate, still-rising foreclosure rates, and credit card delinquencies, among other loan types.



Investors are currently ignoring the “massive losses” ahead for the industry and instead are focusing on the various and sundry ways the government is helping banks recapitalize on the cheap, says Josh Rosner, managing director of Graham Fisher.



But Rosner, who turned bullish on the sector last spring after making some very prescient warnings in 2007, says the bank rally is likely to end by late October, when investors start discounting what’s ahead. “We’re not out of the woods yet,” he says.



Furthermore, Rosner says there are other risks to the industry that aren’t being priced in currently, most notably the FDIC’s ability (and need) to raise fees further as its insurance fund dwindles to dangerously low levels.



The FDIC is likely to hold off until the industry becomes healthier, Rosner says. But "when you think you've got earnings visibility as an investor, all of a sudden you really have to say 'hold on, what are the assessments going to be for the insurance fund'? It has to be significant. At some point the industry has to pay back the FDIC."

Teck Ticker had another excellent interview with Richard Bookstaber discussing whether regulators can save us from ourselves?:

Risk. More than profit and loss, it's the guiding principal of capitalism. The "right" amount creates a healthy financial system and "too much" leads to failure, big and small.



That's the topic of discussion in the accompanying clip. A year after the world realized Wall Street had taken its dose of risk in excess, Richard Bookstaber, hedge fund veteran and author of A Demon of Our Own Design, says there's "less risk in the system right now for the simple reason that everyone's deleveraged." It won't last forever. The incredible trading success Goldman Sachs has enjoyed this year is bound to change behavior, he warns. As they reap the profits, "other people will feel forced to follow suit and start to take risk. That's not a good sign." It's a problem former Citigroup chief executive Chuck Prince so famously addressed in July 2007, when he said: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." What's worse, the risk to the taxpayer has never been greater because former investment banks Goldman and Morgan Stanley are now bank holding companies backed by the FDIC. So how can we prevent the boom and bust cycles former Federal Reserve Chairman Alan Greenspan coughs up to human nature? Bookstaber says regulators "have to make sure the people taking the risk are left holding the bag rather than the taxpayer." "It's really up to the regulator, in a sense, to save us from ourselves," he says.

One thing he said is that Goldman Sachs is now taking risks that paid off, but if everybody feels pressured to emulate them, then they will be building new systemic risk all over again. That is one fundamental flaw of the whole financial system that has yet to be addressed.

Speaking of systemic risk, over in Europe, there are growing calls to regulate the hedge fund industry. Bloomberg reports that that Poul Nyrup Rasmussen, the Socialist Party president who led a two-year campaign to introduce the first European Union regulation of the hedge fund industry, said he will next press firms to reduce their fees.



In an interview with the Guardian on Friday, Spain's Economy Minister, Elena Salgado, has backed European Union plans for tougher regulations on hedge funds stating that hedge funds are not for hedging:



At stake is London's position as the hub for 80% of Europe's $400bn (£240bn) hedge fund industry. If the EU's proposed directive is passed in its current form, hedge fund managers say they may leave their Mayfair offices and flee to Switzerland, where the regulations are less onerous. London's mayor, Boris Johnson, has led a campaign to protect the industry, successfully courting the Swedish, who currently hold the European presidency, and gaining their support for redrafting the directive. But in January, when Spain takes over the presidency, hedge funds will be up against Salgado. "They need to be regulated, and our regulation [in Spain] on alternative investment funds is strict and has been for a long time. Not only hedge funds, but other funds as well, like property funds," she said in an interview following the G20 meeting of finance ministers last weekend in London. "The directive introduces some bigger obligations, in transparency and the protection of consumers, that we think are adequate." Spain is backing France and Germany, which have pushed towards tougher regulation of hedge funds, blaming them for exacerbating the credit crunch by betting on a plunge in banking shares. Salgado, and Spain's ruling Socialist party, also back Angela Merkel and Nicolas Sarkozy's criticism of so-called Anglo-Saxon capitalism, advocating a more socially sensitive model. World leaders will again discuss the role of financial institutions and the way their pay their staff at the next G20 summit in Pittsburgh on 24-25 September. "We have to think about the social costs of our decisions," Salgado says. The debate about bank bonuses has not come to the fore in Spain because its financial system is smaller and there is less transparency about bankers' pay.

In an interview with Il Sole 24 Ore on Thursday, former Federal Reserve Chairman Paul Volcker said banks should not be allowed to own hedge funds or equity funds and their trading activity should be limited:

"A bank that generates the major part of its income from trading should not be allowed to have a banking license," Volcker, an economic adviser to the Obama administration, said. Asked about introducing caps for bankers' pay, Volcker said bankers would find a way around that. "We're seeing it already; it's obscene what they're earning," he said. One year after the Lehman Brothers collapse, Volcker said he feared Wall Street would return to its old ways and "we will miss the train for reform". He said he did not think inflation was an immediate threat given the high unemployment and weak global economic growth. Asked about the high U.S. deficit, Volcker said it was not a problem for the time being. To tackle the crisis the Federal Reserve had injected an enormous amount of liquidity into the system, he said. "For now we can absorb this but it could be a problem when the economy starts to grow again". Volcker said the rating agencies had contributed to the breakdown of the financial system. "A possible solution might be to de-monopolise the sector. Maybe there should be many more of them... And they could be paid by investors," he said.



***UPDATE: Comment from a reader***

Perhaps the next “bubble” is not a sector or a financial instrument per se. Perhaps it is Canada, the country, its currency and the commodity story which underpins its apparent/perceived world class government, banks and healthcare institutions…safe haven with upside leveraged to the global recovery, and without the war machine or media culture of the US. Let the money pour in (and the essence of a bubble is that none of the foregoing strengths of Canada may actually be true, nor durable)…

The banking/ hedge fund/ private equity/ commercial real estate bubble is the Mother of All bubbles, but this is endemic to a culture that promotes excessive risk taking and rewards it with excessive compensation.Finally, a word of caution of the "green energy bubble". Last week Naked Capitalism posted an entry stating that Solar Crisis Set to Hit in 2010 . Again, avoid listening to this doom & gloom. The sun is not setting on solar stocks and top hedge funds are scooping them up at these levels. Moreover, the solar credit crunch will ease in 2010 And then there is the biotech and health care bubble. Biotech is extremely interesting but very risky. In health care, I like medical device shares and monitor a list of stocks that hedge funds are buying. You can also invest in the iShares Dow Jones US Medical DevicesSo place your bets on the next bubble, being fully cognizant that some bubbles are better than others. In particular, some bubbles might allocate much needed resources to renewable energy and health care while others risk the demise of the entire global financial system.An informed reader sent me this comment: