| There have been many famous speculative bubbles in | | | | estate. The consensus on the dollar is that it will keep |
| the past. There appears to be a few forming | | | | falling for the rest of eternity. It may well have hit |
| currently. While it can be profitable to ride the | | | | bottom, or be close to it. Any reversal of the dollar |
| investment while a bubble is forming, it is important | | | | could end the demand from foreign buyers. Also, |
| to recognize when an investment is in a bubble, and | | | | since the hedge fund bonuses are a primary driver of |
| to get out before the bubble bursts. Doing that is, of | | | | the high-end real estate market, an end to those high |
| course, easier said than done. | | | | fees would also cause a lowering of demand. Hedge |
| One of the earliest bubbles was the famous tulip bulb | | | | fund manager fees are also in a bubble, in my opinion, |
| mania in Holland that ended in 1637. It seems very | | | | as is CEO pay. How can a hedge fund manager |
| silly looking back that seemingly rational people would | | | | justify taking such large fees with such generally |
| pay more than ten times an average annual salary | | | | poor performance? How can a CEO justify taking a |
| for a single tulip bulb. That bubble burst, as it | | | | $200 million fee for leaving a company when the |
| obviously had to, and prices came back down to | | | | price of its stock is in the tank? |
| earth. Many people were financially devastated in the | | | | Another bubble about to burst, in my opinion, is the |
| process. | | | | art market. As with housing, part of the driver for |
| Another famous bubble was the South Sea bubble | | | | the art market is the weak dollar, both from the |
| that burst in 1720. Shares of stock in the South Sea | | | | aspect of art in the US being relatively cheaper for |
| Company went from a little over 100 pounds to | | | | foreign investors, and as a place to get out of a fiat |
| nearly 1000 pounds, and then right back to where it | | | | currency into something perceived to be more |
| all started. This bubble, from nearly 300 years ago, | | | | tangible. There was a story in the Wall Street Journal |
| sounds not unlike the gold bubble of less than 30 | | | | today about an actor who bought a horrible Warhol |
| years ago. In the middle to late 1970's the price of | | | | painting about five years ago for 3.5 million dollars, |
| gold was trading much of the time around the $100 | | | | and it just sold at auction for 23.5 million dollars. That's |
| level. Then a huge rally gained steam at the end of | | | | a pretty good return over five years for a piece of |
| that decade. The final blow-off occurred with gold | | | | art that has questionable long-term appeal. Even |
| reaching approximately $850 per ounce. Silver made | | | | more horrifying is the Rothko piece that sold for $73 |
| an even greater advance. When the bubble finally | | | | million. If you are not familiar with Rothko, I'll fill you |
| burst in the first couple of months of 1980, there | | | | in. He painted large canvases - about $100 dollars |
| was a quick drop in both metals, with silver falling all | | | | worth including the stretcher bars, and put about |
| the way back to the starting price. The gold market | | | | another $20 worth of paint, usually in three blobs |
| fared somewhat better, with prices holding about | | | | that resemble a hamburger in a bun. And somehow |
| two and a half time the starting prices at the | | | | that becomes worth $73 million to someone. I think |
| culmination of a 22-year bear market. Gold prices only | | | | when he first painted those abstract buns he could |
| now, after 27 years, are approaching the old record | | | | have put them out on the street with the trash and |
| price, and that is not adjusted for inflation. Silver is | | | | nobody would have picked them up. If you own a |
| still trading less than a third of the price it reached in | | | | Warhol or Rothko, sell before reality sets in. |
| 1980. Not a good long term hold. | | | | The classic car market has a bubble going on as well, |
| Another great bubble was the tech and dot com | | | | at least in my opinion. There was a huge bubble in |
| mania of the late 1990's. The price of any stock with | | | | the late 1980's in exotic 1960's sports cars, especially |
| a "dot com" in its name went on a parabolic price | | | | Ferraris. There was a buying mania that brought up |
| move upward. Many of these stocks had no earning, | | | | the prices paid at auctions well into the seven figures |
| no prospect of earnings, no business plan, and only a | | | | for cars that could have been purchased for a small |
| vague idea for a product. Investors would bid up | | | | fraction of that just a few years before. Many of |
| these shares to market caps far greater than many | | | | the more desirable Ferraris increased by more than a |
| well-established companies with real products and | | | | hundred-fold in a very short time, eclipsing many of |
| earnings. Most of these stocks are now trading on | | | | the famous bubbles throughout history. What was |
| the pink sheets for pennies. This bubble, in extent of | | | | the reason for this bubble? Many would argue that it |
| the price rise and extent of the inevitable fall, far | | | | was driven by an insatiable appetite by many of the |
| eclipses some of the more famous, older bubbles. | | | | newly rich Japanese. Many of these Ferraris were bid |
| So what about today? | | | | up at auction on behalf of Japanese investors, and |
| Perhaps the most obvious and visible bubble today is | | | | the cars were transported to vaults in Japan, much |
| in the Chinese stocks. Some will argue that these are | | | | like people might store gold coins in their safe deposit |
| real companies with real earnings, with growth rates | | | | boxes, with some difference in the size of the box |
| that justify the high prices. However, there is a mania | | | | of course. Many experts suspect the collector car |
| in China as its citizen's line up to open brokerage | | | | auction houses rigged many of these auctions to |
| accounts by the tens of thousands every day, | | | | inflate the prices. The Japanese investors didn't seem |
| buying everything in sight. This is a group of people | | | | to care what they paid as long as they got a car to |
| with little experience investing. They just buy | | | | put in the vault. And what caused this new found |
| because prices are going up, much like many | | | | wealth for the Japanese investors? You might recall |
| beginning and even experienced investors did during | | | | that the Japanese stock market was at the height |
| the dot com mania. They will most likely get burned | | | | of its bubble at about the same time. They were |
| when the inevitable pin finds the bubble. Those | | | | buying up US landmark buildings. The bubble in their |
| analysts that should know better keep telling | | | | stock market collapses, even though experts said it |
| investors that "this time it's different." It is never | | | | couldn't, and it brought down the market for sports |
| different. The same story repeats again and again. | | | | cars with it. The Japanese stock market has yet to |
| Another bubble in the process of bursting is the real | | | | get anywhere near its all time high as this is being |
| estate market. Recently there have been headlines | | | | written. The price of a few selected Ferraris is now |
| daily about investors making thousands of dollars | | | | only approaching the price, in dollar terms not |
| overnight by house flipping. Condos were being | | | | adjusted for inflation, of the peak about 18 years |
| pre-sold to flippers. People were borrowing on their | | | | ago. |
| increasing equity lines of credit to leverage more real | | | | So what does this have to do with a bubble in the |
| estate holding, or just to live beyond their means. | | | | classic car market now? The emphasis has shifted |
| Ordinary housing was being priced far higher than any | | | | from exotic European sports cars to much more |
| person working for a salary could afford. If you didn't | | | | mundane and ordinary American muscle cars from |
| have a house to trade up from, a trust fund to tap, | | | | the mid-60's to early 1970's. Very ordinary Plymouths |
| or an inheritance, you couldn't possible come up with | | | | and Chevys with a muscle car engine, and perhaps |
| a down payment. People in high paying professional | | | | some factory paint option like a racing stripe or some |
| jobs couldn't qualify for the most basis starter home | | | | other gimmick that would make the car slightly more |
| in many markets. Schemes were worked out to get | | | | rare than one off the showroom floor, are fetching |
| around the down payment requirement, and to get | | | | prices at auction well into the six figures. I was |
| around the income reporting and verification | | | | astounded watching one auction where an orange |
| requirements. This kept the bubble going. All the real | | | | 'cuda (a Plymouth Barracuda) of early 1970's vintage |
| estate agents in the world saying "this time it's | | | | went for over $300,000. This was a car that |
| different" couldn't stop that bubble from bursting. | | | | probably cost under $4000 new. I would suspect five |
| One interesting exception currently is in the | | | | years ago if someone put the keys in the ignition and |
| Manhattan real estate market. Prices of condos and | | | | a sign saying "please take me" that there would be |
| co-ops in Manhattan are still rising fast as the rest of | | | | no takers. So why is this bubble happening? The |
| the county is seeing prices drop. What is happening? | | | | classic car experts say it is because the baby |
| There are a few logical reasons. The city is more | | | | boomer men that grew up in the 1960's that weren't |
| desirable now that it has been cleaned up and made | | | | for one reason or another able to buy these cars, |
| safer. Congestion and travel times are a factor for | | | | are now in a position to recapture their youthful |
| people wanting to live close in rather than spending | | | | dreams. There may be something to this. I go to |
| three or four hours a day commuting. But prices for | | | | many car shows every year and see pot bellied men |
| decent apartments are well beyond the reach of | | | | in their early 60's standing next to their exhibited |
| anyone working for a salary and having to deal with | | | | Chevelle, Corvette, or 'Cuda. Also, unlike Ferraris, |
| financing. This is a problem in much of the nation, as | | | | these cars were so undesirable for so long that most |
| pointed out earlier, but in New York it is magnified | | | | have probably been junked or poorly cared for, so |
| beyond reason. If a doctor or other highly trained | | | | clean specimens probably are somewhat rare. Similar |
| and highly paid professional moved to Manhattan and | | | | cars from the 30's, 40's, or 50's are not fetching |
| wanted to purchase a home suitable for a family, he | | | | anywhere near the prices of the American muscle |
| she would not make anywhere near enough money | | | | cars. |
| to qualify for a home, let alone be able to save | | | | It is very difficult to see the bubble from within. It is |
| enough for 20% down. If a doctor cannot purchase | | | | always obvious that a bubble existed once it has |
| a home near where his practice is, then I would | | | | popped. Investors in stocks and futures have some |
| suggest that area is in a bubble. | | | | advantage, as it is easier to put in a stop loss to |
| If the real estate boom continues in Manhattan, the | | | | protect against a drop when a parabolic price |
| only people left who will be able to afford an | | | | advance occurs. Other investments move at a much |
| apartment will be hedge fund managers, star baseball | | | | slower pace, which makes the rise and topping action |
| players, rock stars, actors, or those receiving huge | | | | much more difficult to spot. But when everyone says |
| inheritances. The city will lose its soul and character. I | | | | "this time it's different" and then goes on to explain |
| hear so many stories of people who paid $200 | | | | why the price advance will never stop, it is usually a |
| thousand for an apartment 20 years ago, and are | | | | good time to exit. If you are in a theater and smell |
| now able to sell it for six million. One new building on | | | | smoke, it is probably wise to get up out of the seat |
| Central Park West with over 200 units, sold out with | | | | and get near an exit. It might be a false alarm. |
| an average sales price of $10 million per unit. | | | | Someone might have lit a match to set the time on |
| Apartments with a park view were getting over | | | | their watch and the smell drifted past you. You can |
| $6000 per square foot. As desirable and great as | | | | always return to your seat. But if you wait for proof, |
| Manhattan is, the price of apartments is in a bubble. | | | | and smoke begins to fill the room, someone yells |
| It will burst. Those who pay these prices will get | | | | "fire," and everyone rushes for the too few exits, |
| burned when the bubble bursts. So what can pop this | | | | you will wind up getting trampled trying to get out. It |
| bubble? The falling dollar, another bubble in reverse, | | | | is better to sell when the demand is in a mania than |
| has encouraged foreign purchases of desirable real | | | | after the top when everyone wants out. |