Forever Blowing Bubbles

Does the economy depend on having bubbles somewhere?

Source: Pixabay

It seems like the global economy has moved from bubble to bubble to bubble. Over the past twenty years we’ve gone from the Asian Tiger bubble to the tech bubble to the housing bubble to the China bubble to the oil exploration bubble. In all cases we had overly-optimistic growth assumptions which led to overinvestment which led to oversupply and an eventual price collapse. Some have called this, “The Law of the Conservation of Bubbles.”

Source: Jean-Paul Rodrigue

These bubbles are rooted in excess savings looking for a new, new thing. The most profitable companies in the world (Apple, Google, Alibaba) don’t need new factories or even much physical presence. These aren’t steel mills or electric utilities. By capitalizing on the knowledge economy, these firms have built up immense cash reserves, dwarfed only by the sovereign reserves of countries like Norway, China, or Saudi Arabia.

Tens of trillions in globally mobile capital is searching for investment opportunities in an era of negative real rates. The biggest surprise is that markets haven’t been more volatile. What can the small investor do?

Stick to the fundamentals: stay diversified, don’t get swept up in fads, and remember that returns depend on profits. If you invest in boring, cash-generating companies that consistently return their cash to you, you’re less likely to get burned.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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By |2017-07-17T12:22:58-04:00April 27th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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