Friday, October 29, 2010

I wrote a post the other day...

...about asset bubbles and I must not have been very clear on what I was trying to say. So let me take another stab at it.

Alan Greenspan once famously said, "It's easy to see bubbles looking back; it's not so easy to see them as they are developing."

I disagree -- and that's my point. I think we all know when we're in the midst of a bubble; we just underestimate its longevity.

Take four examples from my lifetime: the gold and precious metals bubble of the late 1970s, the stock market bubble of the '80s, the dot-com bubble of the '90s and the real estate bubble of the aughts. I would argue that in each case, the conventional wisdom was that the particular asset in question was, in fact, in a speculative bubble; it's just that each one lasted longer than anyone expected.

I remember watching "Wall $treet Week, with Louis Rukeyser," back in the late '70s when the guests were discussing the bubble in precious metals. I immediately called my brother and breathlessly told him, "Some guy named Hunt is cornering the silver market!" as if I had any idea what that meant. He replied, calmly, "Yeah, the Hunt brothers. Everybody knows that." And I thought, really?

Well, it wasn't too long before the precious metals market collapsed and the Hunts lost a ton of money. And who got rich from short-selling? Beats me. All I know is that everyone who tried -- for two years -- got run over.

(By the way, if you haven't heard this story about Lamar Hunt, the founder of the Kansas City Chiefs, it's a good one -- if not necessarily true:

A reporter was said to have told his father, H. L. Hunt, "Mr. Hunt, your son is going to lose $1 million a year on that new league." And the oil baron is supposed to have answered, "Well, at that rate he'll be finished in 150 years." I think that was lifted from Citizen Kane, but whatever.)

Then there was the stock market bubble of the '80s which ended in October, 1987. I was working in the S&P pit at the Chicago Mercantile Exchange and all I remember is everyone getting short on every rally in anticipation of a market crash. The best example was a new trader who got short hundreds of contracts one day in August of that year only to get liquidated by his trading firm. That was about a week or so before the all-time high at the time.

And who called the top in the market? Some analyst named Elaine Garzarelli. Ever heard of her? I didn't think so. Oh, and every other analyst called for a top, too. It's just that they started in about 1982 and were all wrong for five years.

The dot-com bubble of the '90s? I had a conversation with my brother-in-law, the investment banker, at the time about I asked him if they were for real, did they make any money, etc. And he basically said, "No, none of it makes any sense."

"So we're in a bubble, then, right?"

"I guess so."

Did we get short Amazon, or any other dot-com stock and make millions? Of course not; the Nasdaq rallied for another three or four years after our conversation. (Amazon, ironically, was one of the dot-coms that turned out to be profitable.)

Finally, there was the real estate bubble of the last decade. And again, I recall riding my bike and walking around town and wondering, "Am I the only poor sap who can't afford a $2 million house? Or is this all some great big bubble?" Sure enough, the bubble burst -- four years later!

So let me try it one more time: the bond market right now is in a bubble. But anyone selling bonds (or buying inflation-protected bonds) is probably going to be sorry, because bubbles last a lot longer than we think. My take away from this recent auction of negative interest five-year notes is that inflation won't be back for a long, long time.

No comments: