Bubblenomics

Are we in a new bubble?

That’s the question today. As stock prices make record-setting gains after falling record-setting amounts, some wonder whether a new bubble is in the works. To answer this, it helps to understand what it takes to form a bubble.

First, you need to have a new technology that seems to “change the game” in a major way. Second, the new way needs to displace the old way and lead some to conclude that “it’s different this time” and that old analytical rules no longer apply. Finally, a broad swath of investors need to jump in, enticed by rising asset values and the prospect of easy leveraged riches. Both the internet and the housing markets went through these steps.

So, are any bubbles forming now?

Stocks certainly aren’t in a bubble. Too many people are too skeptical. Ditto for real-estate. Bonds? Please. Sure interest rates are low. But most folks expect rates to go up, not prices.

But how about Gold? Gold prices have recently spiked, and many gold investors are saying that the economic slack that might prevent inflation doesn’t apply this time. Most remain skeptical, however. For there to be a real bubble, you need a general mania.

Financial bubbles are highly destructive and hazardous to everyone’s economic health. While it pays to be vigilant, it doesn’t look like we’lll see one any time soon.

Douglas R. Tengdin, CFA
Chief Investment Officer
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