Another bubble about to burst

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…” 

Charles Dickens, “A Tale of Two Cities” 

The past 12 years in America have been volatile to say the least.Trillions of dollars have been earned, trillions of dollars have been printed and trillions of dollars have been lost to dollar heaven. The stock market has essentially been flat with a bunch of peaks and valleys in between. 

In simple terms, it really was “the best of times and the worst of times.” 

And if you look at it in terms of bubbles bursting, there are two very distinct and vivid bubbles that we all lived through, yet didn’t seem to learn any lessons from. 

The first was the technology bubble. If you were an investor back in 1998-1999 you couldn't turn on the TV, talk to your financial advisor or possibly even your Bible study group without hearing stories of the sizzling hot new tech stock that is soaring up, up and away. These tech stocks were being created left and right out of thin air, most had no profits, many of these new companies were run by young adults fresh out of college, and we were all throwing money at them like we were crazy. 

We didn't exactly know why, but we knew that everyone else was doing it, so these companies must be legit. The best way to describe it would be a mania or a frenzied rush to get the latest fad. Kind of like Sea Monkeys, the pet rock or Reebok Pumps, except a much more expensive lesson in falling for a fad. 

And just like all of these fads, after some time people started to open their eyes and realize they were paying too much for extremely overpriced merchandise. Even the talking heads on CNBC were telling us something wasn't right. These companies had no profits. The P/E ratios were the highest in history. 

These tech companies couldn't spell the word dividend. Yet, we kept throwing money at it. We kept telling ourselves, this time it has to be different. 

The second bubble was even bigger and had been building for some time. Housing has always been considered a wise investment and many Americans would consider their home their largest asset. But when someone can make 100 percent in home equity in under two years (like a few hot cities did), red flags should have been waving and the alarms should have been ringing. 

Yet Americans wanted to believe this time was different. This time housing will continue to skyrocket. What could possibly slow this momentum down?

But with this bubble, not only did the average Joe jump in and buy houses, but every bank, broker and mortgage company in the country wanted to get in on the action. As with any bubble, people were making money as it grew. 

Tons of money. The kind where average people (in the investment, real estate and mortgage arena) who were making $100,000 a year found themselves making up to $800,000 in some instances. They started to believe it was because they had become smarter and this was their time to shine. But as fate would have it, the party came crashing down. 

And just like all bubbles that seem to keep growing with no end in sight, the bursting comes and brings tears to all of the little girls and boys. In this case, it was adults with real money and real fortunes down the drain. Hadn't we learned our lesson from the technology bubble that cost American's trillions of their savings just seven years prior? Are our memories really that short? 

History would say yes. Although there have been fads and bubbles since the beginning of time, the last 20 years have brought a wave of bubbles unlike any in history. In fact, there have been numerous books written on the subject alone. Across the world, there are signs of bubbles forming in almost all sectors from construction, banking, stock markets, IPOs, etc. So the big question is, “What will be the next bubble to pop?” 

Are we living in it now? Keep in mind, we just lived through two huge bubbles, yet most people never knew until it is too late. That is the scariest part about a bubble. Everyone can look back and say, "It was so obvious. I could have told you that was going to happen." 

Yet, most people never do until it is too late. 

Here is what we feel that we have to point out. Everyone loves to win, correct? We believe deep down everyone wants to be part of something that is doing well, making money and is successful. It is only natural. 

That is exactly why these bubbles work so well. Everyone else hearing about people making money buying certain stocks or owning a home is contagious. Hey, if they can do it, why can't I?


The same mindset applies to the overall economy and stock market. Deep down, everyone wants to be part of an economy that is growing and prosperous with a stock market that is solid and ever growing. But isn't that exactly the same naive emotions that led to bubbles? Let me explain further. 

Today (March 9, 2012) the stock market is having a great recovery and seems to be on a track to reach its all-time highs again in the near future. The talking heads on TV all seem to think the worst is behind us and that we are back on track for economic growth. And we are all optimists and hope for the same thing. 

But what has really changed for the better? In decades past, the strength of the economy was measured by things like gross domestic production, unemployment, inflation, construction start up, housing, imports/exports and our deficit/surplus. But these days we seem to have forgotten a few of those indicators and become solely focused on the stock market and what the Fed is doing. 

Yes, the stock market has a huge influence on all of the factors listed above, not to mention the impact it has on most American's 401(k)s. But we can't be alone when we say it feels like the current stock market gains are only being fueled and propped up by printing more money and capital infusion. 

Housing and unemployment, two of the most important indicators on how the overall economy is doing, continue to slump. Europe is on the brink of imploding. China is seeing signs of slowing down. Our debt is running out of control. 

Are we really seeing economic growth again or just drunk on quantitative easing and newly printed money? Due to the market celebrating and pushing up the stock market every time there is some form of easing or capital infusion from the Fed, our bet is on the later. 

Could there be other reasons the market continues to keep rising even with all of these negative things going on around us? If your answer is a renewed confidence, then I won't debate you. In fact, I agree with you. 

But consumer confidence and stock market confidence can only take you so far. At some point you need real numbers to back up the gains. We urge you to stay educated, don't get you or your clients suckered into bubbles and remember that everything that goes up with no rhyme or reason will come down at some point. The only question is when and how fast. 

* Nothing in this article should be considered investment advice