The Bubble in Bubbles

Source: Barron’s

If you have been paying any kind of attention to the mainstream media the past few years, you may have noticed quite a bit of bubble chatter. We have a tech IPO bubble and a stock bubble and of course a bond bubble. This is caused by a global central bank QE  bubble. We had an Apple bubble, we had a fraud bubble, we had a derivatives bubble and a subprime bubble. Silicon Valley is having a start up bubble, and parts of south Florida and Manhattan are having mini real estate bubbles. The gold and oil bubble came and went. The cover of Barron’s this weekend was literally a bubble – the second such bubble cover in two years.

We have had so many bubbles that, as I first addressed in 2011, we are having a “bubble in bubbles.”

What say we step back and put this into a bit of context?

First off, there have been several legitimate bubbles the past decade or so. In the late 1990s, we had a full-on dot.com bubble. In every sense of the word, these stocks rose to bubbly heights, unsupported by anything more than wishful thinking and greed. The Nasdaq plummeted about 80 percent peak to trough; it is still more than 20 percent below its all-time highs.

In the 2000s, what most people describe as the housing bubble, was actually more of a credit bubble. Subprime mortgages and refis went to anyone who could fog a mirror, prompting a spending spree that focused on housing but also included flat panel TVs and cars and home re-modelings. That ended with a national real estate crash of 35 percent. Not unprecedented, as was frequently misreported — the Great Depression was far worse — but very significant.

Its worth noting that as a sector, both home builders and banks lost about 80 percent of their value.

I hesitate to call the 2000s commodity boom a bubble. Commodities are priced in dollars, and the U.S. dollar lost 41 percent of its value from 2001 to 2008. Naturally, anything priced in dollars was going to rally, and once the euro and yen decided to join the race to the bottom, commodities would be at risk. Regardless of bubble status, oil and gold are both off their highs by 35 percent or so.

Which leads me to the point of today’s discussion: In any historical asset bubble, we do not get bubble magazine covers in major news media at the height of the bubble. If anything, it’s the precise opposite. A positive story on gold on the cover on New York Times Magazine in 2011 — and GLD passing SPY as the biggest ETF — marked the top. Perhaps the most infamous was the June 2005 Time Magazine cover on “Why We Love Housing.”

Mainstream coverage of bubble-like events such as panics and manias results from the natural tendency to be part of the exuberant crowd, to contribute to the animal spirits of a bubble in real time.

I am hard-pressed to recall when any sort of bubble was accurately identified in real time on the cover of a major media publication. If anything, the opposite is true.

All of the skeptical bubble talk — and there has been lots — seems to be a contrarian indicator that this long-in-the-tooth, overpriced market might still have a ways to go.

Previously:
The Bubble in Bubbles (Reflexive Version); May 30th, 2011

Checklist: How to Spot a Bubble in Real Time; June 9th, 2011

Time Magazine Covers & the Stock Market; Jan. 17th, 2011