Bubbles are dangerous things. They are slippery, amorphous entities – difficult to diagnose and even harder to avoid once discovered. They burrow their way into the public psyche, slowly driving otherwise reasonable people mad with both greed and pride.
Perhaps the only thing more financially destructive than a bubble is an entire bubble economy. Of course, such an unusual phenomenon is incredibly rare, perhaps occurring only once every century at best. Alas, we do not live in financially normal times at the present.
Instead we labor under the burden of central banks who, rather disturbingly, believe bubbles are a wonderful way to sustainably grow an economy. This absurd tenet of modern central banking is akin to an irrational, cult-like faith. In fact, actively striving for a bubble economy is so bizarre that for a long time I couldn’t figure out what the hell the world’s central bankers were thinking.
After all, throughout history, every major financial bubble has been followed by an inevitable economic bust. And the pain from those devastating economic busts was always commensurate with the magnitude of the preceding bubble. Simply put, the bigger the bubble, the bigger the bust. So what central banker is his right mind would want to create a bubble economy?
Then I read an article on the Financial Times’ website titled “The Importance of Bubbles That Did Not Burst” (warning: this article is behind a paywall). This article posits that while some bubbles burst with disastrous results, there are many that don’t. This shocking assertion comes via a Yale School of Management professor named William Goetzmann.
A self-proclaimed expert on stocks, hedge funds, real estate and art, Mr. Goetzmann conducted a study that defined a bubble as a doubling of the stock market within a one year period. This is, of course, a terrible way to define bubbles. There are many, many instances other than bubbles where stock markets double. For example, recessions often cause equity markets to overshoot on the downside. The stock market doubling from such depressed levels is normal and cannot be considered a bubble by any stretch of the imagination.
Predictably, both Mr. Goetzmann and the Financial Times article based on his study conclude that some bubbles are good. You just have to make sure your bubble doesn’t burst, at which point you are golden! In light of this terrifyingly naive conclusion, which would probably garner the average elementary school child no better than a C-, the Federal Reserve’s determination to give us a 100% bubble economy makes more sense.
Once we stop laughing (or crying) at the intellectual inadequacy of the unfortunate Mr. Goetzmann, we should cut him some slack. After all, he’s a finance professor at Yale who has probably never had to change his car’s oil or mow his own lawn. Like most ivory-tower academics, he is utterly disconnected from reality, including the calamitous after effects of large-scale asset bubbles.
He didn’t see the last financial crisis coming in 2008 and he won’t see the next one either. When Yale gives you a paycheck no matter how outlandish your ideas are, you don’t need to be particularly bright. Personally, I’d rather get my financial advice from a community college drop-out than an Ivy League professor.
So what recourse does the average person have? It is obvious that we are currently living in a full blown global bubble economy. The S&P 500 is trading near all time highs on several different valuation measures. U.S. real estate prices are as high, or higher, than they were at the peak of the 2007 mortgage bubble. Large corporations have been issuing record amounts of debt in order to pay out dividends and buy back shares. Any of these circumstances is worthy of being called a bubble on its own. Taken together, they indicate a bubble economy of unprecedented proportions.
In the end, I think tangible assets are one of the few reasonable alternatives in a world plagued by serial bubbles. Bubbles, by their very nature, represent an economy that has made more promises than it can possibly keep. Tangible investments that you have physical possession of – fine art, antiques and precious metals, among others – are an effective antidote to the false promises of the global bubble economy.
This is one of the reasons I started the Antique Sage website. I want to show people that art and antiques are a viable alternative to the overvalued paper assets overrunning our dysfunctional bubble economy. Our central bank overlords may improbably believe that they can inflate bubbles that won’t burst, but smart investors are making preparations for a very different outcome.
