New Bubble Theories Debunked

New Bubble Theories Debunked
“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

It’s truly amazing to me how, after coming off two of the biggest asset bubbles in U.S. history, analysts and institutional think-tanks are predicting that other bubbles are developing.

Of course, our first big bubble to burst was the real estate bubble. Property prices in the U.S. peaked in 2005 and then came crashing down. Stock prices hit their peak in October 2007 and crashed from there. (On a separate note, it is very interesting to note that, back in the 1920s, the same thing happened. First, real estate started coming
down, in 1927, and then the stock market crashed, in 1929.)

Now we hear talk of two new bubbles developing. And I adamantly disagree with both. I see them as bull markets, not bubbles. Here’s what I’m talking about:


First, we’ve been hearing the talk about the bubble in gold bullion prices. It is about time we face the facts about gold? The U.S. dollar is losing its status as the reserve currency to major world central banks. As that happens, gold prices strengthen, not weaken.

We have countries like China promoting gold as an investment for their citizens. We have pending inflation thanks to the most accommodative monetary policies since the 1930s. And, all the while, gold is still selling for less than it did in the early 1980s when adjusted for inflation. I see gold in a bull market, not a bubble.

Next, we have calls of a bubble developing in Asia, specifically in their equity and real estate markets. The fear is that easy money is pushing assets up in prices for properties and stocks in Asia. Again, we need to face the facts. China is becoming an increasingly important player in world economics. I truly believe that President Obama, who is in China today, is seeing himself, firsthand, the omnibus growth momentum in China.

China is not in bubble territory. On the contrary, China is slowly, but surely and sadly, eating away at America’s role as the world economic power.

Finally, you have to wonder about some of the people and institutions behind the bubble theories these days. I read a report that the International Monetary Fund (IMF) was ringing warning bells about bubbles in Asia. The IMF? Aren’t these the same people that recently sold 200 tons of gold bullion to India at prices lower than what gold is selling at today?

Michael’s Personal Notes:

By the time you read this today, I’ll be on a plane headed to Miami. It’s my usual trip to see how the real estate market in the once-booming condo city is faring. I also like talking to local business people in Miami to get a feel for how the economy is doing here.

Once the property market started coming down in 2006, cities like Miami that were under a construction boom were particularly hard hit. I’ve seen banks (who have foreclosed) selling properties in Florida for half what they sold for in 2005. I’ll report back to you next week on how property prices are holding up in Miami and on any indication of economic progress there. The first signs of economic growth in the U.S. will come from cities like Miami.

Where the Market Stands:

Steady Eddie. The Dow Jones Industrial Average continues to trade above the important physiological level of 10,000. After being up six of the past seven trading sessions, the Dow Jones was down yesterday. I find that whenever the market moves lower, analysts and investors come out with an “I told you so” attitude. I guess they’ve been telling us “I told you so” since March, but the market just continues to move higher.

To be exact, the Dow Jones Industrial Average is up a big 58% since its low on March 9, 2009. Why fight a market that keeps moving to new record 2009 highs almost every day? As they say, if you can’t beat ’em, join ’em!

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had realized.