Bubbles, Bubbles, Everywhere!

24 Mar

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I want to show you the dangers of allowing bubbles to form. Im not talking about the spheres of soap that you played with as a kid, but rather the asset bubbles that are caused by lax policy and greed. I want to show you this, because I think that the mother of all bubbles is headed in our direction. If it pops in our lifetime, then it could very well wipe us out!

In order to understand bubbles, you must first understand Sir Isaac Newton’s famous words, “What goes up must come down.”  There have been bubbles forming and collapsing for centuries, from the popular Dutch Tulip Bubble to the most-recent housing bubble.  I do not want to go into great detail as to why and how these bubbles form, because I think that a few, simple pictures are all that is needed to grasp this concept.

My first relationship with bubbles came in the 90s, when I watched the NASDAQ run fromjust a few hundred points to 5000 points in only a few, short years. Here is what the NASDAQ’s chart looked like going into the millennium: NASDAQ Bubble. As you can see, there was a steady climb for several years. Then, within a 2 year timeframe, the chart goes almost vertical. At the time, everyone was euphoric because they were living inside of the bubble. Here is what soon followed: NASDAQ Bubble Pop. It took only 1 year for the destruction to play out. Everyone was hurt, but apparently nobody learned a lesson.

In the early 2000s, fueled by low interest rates and a government push to put every American in a house of their own, the real estate market began to take off. At the time, I was living in Florida, ground zero to the mayhem that would ensue. Let me preface this by saying that a typical real estate market appreciates at a couple of percentage points a year. By the mid 2000s, Florida’s real estate market was going up 40% a year. I even bought and sold a few houses that went up 50% and more in less than 1 year. I was happy, along with everyone else, because we were living in a bubble. Luckily, I had lived through the aforementioned bubble, so I did not stick around to bear the brunt of what was to come. Take a look at this chart of the Case-Shiller Index in Phoenix, Arizona- Housing Bubble Chart– another hotbed for real estate appreciation. Notice how in “normal” years prices moved slow and steady. By 2004, the slope of the chart begins to take off, and by 2007 it almost exactly mirrors the NASDAQ chart that we just studied. In 2008, the real estate bubble popped, and I do not need to explain the fallout that followed.

The bubbles popped because the “paths were unsustainable.” Does this phrase sound familiar to you? It should, because it is being used to describe our nation’s accumulation of debt. Take a look at this story and the accompanying charts. Do the chart patterns look familiar to you? Do you worry at all that the rise in debt might cause the destruction of our currency? The NASDAQ chart represented a few billion dollars in wealth destruction. The Case Shiller chart represented hundreds of billions of dollars. The National Debt is increasing by trillions each year. What are the ramifications of that type of fallout? Was the stock market crash painful to your portfolio? Was losing your home inconvenient? The harm caused by these bubbles pales in comparison to the disaster that would accompany the destruction of our currency.

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