Are All Assets a Bubble?


Over the weekend I read a Wall Street Journal article about how all assets – bonds, stocks, gold, commodities- were rising and how this was a) an anomaly and b) how it reflects confidence in Central Banks. I got a good laugh out of this because rising domestic asset prices reflect the exact opposite; namely an utter lack of confidence in Central Banks. Are wealthy Europeans purchasing high-end real estate in the U.S. sight unseen because they have so much damn confidence in the ECB and their leaders back home? Let’s get serious here.

The positive correlation between general economic conditions and asset prices is one I’ve always told you to question. It’s interesting in fact that this article about asset prices rising across the board came about a week after we revised our 1st quarter GDP sharply lower into negative territory for the first time in years. With such obvious data, are any eyes being opened right now? Probably not.

People are going to get wiped out by the next crisis. The global economy is in a precarious state where the proverbial straw can and will break the camel’s back. And people don’t see it. The level of delusion I’m seeing now reminds me a lot of the delusion I saw in 2007. But the thing is, a global crisis is not necessarily a negative for asset prices in America; in fact, it can be the very catalyst that drives asset prices in America even higher.

A Whole New World

This coming crisis will be in large part a function of the dynamic global economy that increasingly favors those with unique and valuable skills. Think about it this way: back when we were farmers relying on manual labor, it was difficult for people to distinguish themselves. Sure maybe you could produce 20 or 30% more through sheer determination, but exponential differences in production were not possible with such crude technology.

With advances in technology, the gap between the “haves” and “have nots” has widened. This shouldn’t surprise anyone. There is a threshold ability level needed to manipulate new technology effectively, and this threshold increases as the world becomes more complex. We’re seeing this now with Millennials. Many Millennials did everything the “right” way (go to school, get good grades, and get into debt because you will undoubtedly recoup the “investment” magically) but their path in life was based on an economic model of a previous generation. No longer is it sufficient to be able to read, write, and not ruffle any feathers for someone to live comfortably. Technology and the wide dissemination of information is great for some people and a pure nightmare for others. Just make sure you’re in the first group.

The world is changing in ways that can not be appreciated by the average person in America who can’t be bothered to read even one book a year. Most people in the world are not in the “open-minded, intellectually curious, mentally sharp” category. They’re just not. And interestingly enough, studies have shown that incompetent people by definition don’t know they are incompetent and tend to overrate their ability. (See: Dunning-Kruger Effect). So don’t try to convince people to see the light because it’s a useless endeavor.

Anyway, it’s the wealthy and the early manipulators of technology (those with the right skills) who are driving up asset prices. It is not the 25 year old taking orders at a restaurant or the law school student who had no career options so decided to go $100,000 into debt and though that was a brilliant idea. The very wealthy are increasingly immune to what is happening around them.

They can not spell recession.

So people can keep on talking about a bubble in stocks- they’ll miss the entire rally just like the skeptics did between 1982 and 2000. This is a classic 1932-1937 rally in the midst of weak economic conditions and a shifting economy.

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  • jerry

    Hi Moses
    My last post didn’t seem to get through. I asked what your opinion of the legal profession and lawyers is. There are a lot of very intelligent lawyers working on Wall Street earning lots of money – and these guys are really intelligent. They could have been bankers or hedgies or whatever. A strong legal profession is crucial to a working economy just as much as the titans of industry (slight exaggeration). They don’t seem to get much of a look in in your analysis though. What do you think their future is?

  • Moses

    Hey Jerry,

    I think generally you will need to be more skilled in the new economy. The very best lawyers will always do well as in any other profession. There are certain things that can’t be outsourced or completed by a computer (yet).

    But overall there is a glut of lawyers in the U.S. just like there was a glut of undeserving people on Wall Street. The market always normalizes in the long run.

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