Does the economy depend on having bubbles somewhere?
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
Leave a comment if you have any questions—I read them all!