If you were to monitor social media to determine whether or not we’re living in some kind of bubble, your brain would soon shut down from overload.
Nouriel Roubini, unofficially the forty-eighth person to earn the nickname “Dr. Doom”, has built a career on having correctly called the “bubble” in the years leading up to 2008. For that, he’s earned his badge in the hall of all-time great pundits. Can you imagine what his inbox looks like? Chock full of journalists pestering him about what the next bubble will be, no doubt. “Doesn’t anyone care what I think on any other subject?” he must ask himself in his less doomy moments.
Meanwhile, sensing an irresistible career opportunity, every other commentator on the internet is currently declaring the existence of a bubble, whether it’s a Bitcoin bubble, a bubble in MOOCs or a Chinese bubble. Gold bugs, BRIC advocates, tulip maniacs: there’s always some new fear-based engine into which to shovel money.
Parsing the deluge of text and noise that threatens to overwhelm our senses each day is, to say the least, a challenge. Making sense of the advice prognosticators standing on either shoulder and shouting binary commands into your ears is practically impossible, and the development of your own set of critical faculties remains the product of a long process involving careful listening calibrated with your own painstakingly cultivated inner judgement.
Poor Irving Fisher is remembered today as a punchline for predicting, on October 15, 1929, “Stock prices have reached what looks like a permanently high plateau.”
Here’s the thing. Bubbles are about as easy to predict as earthquakes. We kind of have a sense of where and how serious they might be, but we are really bad at actually pinpointing their behaviour. In fact, we don’t even really know of the existence of a bubble until it pops.
Back in 2000, Jim Cramer laid out his investment philosophy at a moment when the NASDAQ surfed above 5,000. “So, if you can’t own the retailers, and you can’t own transports, and you can’t own banks and brokers and financials and you can’t own commodity makers and you can’t own the newspapers, and you can’t own the machinery stocks, what can you own? A-ha, that just leaves us with tech. That’s why we keep coming back to it. That’s why, despite the 80% increase in the Nasdaq last year, we are looking at another record year now. It is by that process of elimination that I have picked my top 10.” You could look up his top 10 for the coming boom year of 2000 if you’re in the mood for a belly-laugh.
You do not need to be an investment banker, or have any qualifications, really, to know that just putting your money someplace because it’s easier than the alternatives is bad advice. The purpose of investment, after all, is to invest. You put your money in something that, for lack of a better word, you believe in.
That can mean two things. You can pin your hopes on something that doesn’t exist or won’t ever happen. (Remember “Dow 36,000”? You can pick it up used for one penny on Amazon.) Or “belief” can apply to something in which you have faith, in the old-fashioned sense. You like it, you think it’ll better humanity, or at least your bank account (and by extension humanity), that it’ll increase the common wealth. So you invest in it.
In the eventuality of things really going wrong, there’s not much you can actually do. Buy a crossbow? Keep canned goods? Learn to garden? Whether you invested wisely or stupidly, we are all going down (or up) together. And you can either feel good about how you used your time, or you can chase after every trend and vapour trail, like a cat batting at some shiny tinfoil. You can do something you love, something that you feel is worthwhile, or you can cynically dump all your energy and resources into something you feel nothing for in the name of flipping some cheap property. It’s all about how you want to feel at the end of the day.
In 1929, Irving Fisher lost his fortune. Him and everybody else. He was valued at approximately $10 million, a vast amount for that time. Did he jump off a building? No. He depended on the generosity of his sister-in-law and Yale University and kept writing.
In the wake of the tech collapse of 2000, the Federal Reserve pursued a policy of keeping interest rates low and goosing the economy with quantitative easing. And this created ideal conditions for a real estate bubble. And on and on it goes, bubble after bubble after insane bubble.
Some things, however, abide. Ex-Bank of Canada Governor Mark Carney warned that while “The value of assets can go up and down … Debt endures.” No responsible public official is going to say, “Yeah, we’re in a bubble,” to a reporter. What they will do is sound a “note of caution” and offer prudent counsel on the “downside” of risk. But the only way human civilization advances is through risk.
Some forecasters will point out that the next bubble is about to pop: real estate, the price of gold, classic cars. No kidding. There’s always going to be a next bubble. Meanwhile, the Federal Reserve spends $85 billion on bonds per month in the hope that unemployment falls and people start spending again while interest rates remain low and the US economy ekes out modest growth month after month, in the hope that everything will eventually return to “normal”, like they were in the ‘90s.
Netscape founder Marc Andreessen, who knows a thing or two about bubbles, recently commented on the recent speculation that a renewed frothiness in the U.S. tech scene is, in fact, the b-word. He believes he has found a method to determine “the opposite of a bubble”.
“There’s no bubble,” he said. “There’s not even a little trace of a bubble. It’s the opposite of a bubble. We had the bubble, it was in 2000. Everybody worries about the bubble when there is no bubble… When there is a bubble, you stop worrying about a bubble, which is what makes the bubble.”
But can history tell us anything elsea bout detecting bubbles before they actually happen? There may, after all this time, be one method that trumps all others. Track the wages of prostitutes.
Below: Don’t panic; stocks are safe…