Thundering Herds blow bubbles. They cannot stamp them out.
The problem with investment bubbles is that most people seem to know what they are, are scared of getting wiped out by one, but yet cannot accurately describe what makes something a bubble.
They describe bubbles as something that will cause them catastrophic loss. Many times they get their information on the bubble of the day from .. well, the financial media. Which as I discussed in Part I is not always objective and likes to keep you nervous, on edge, and tuned in.
Several good writers have already summarized the main phases of a classic bubble. I did not create the below chart but have seen it in multiple places. I am reposting this image from Steve Blank's interesting postings, who has a series focusing more or less on VC and technology prospects.
In this chart the Smart Money moves in stealth mode to acquire the asset while Awareness gradually picks up with other Institutional players, followed by some light cashing in, followed by a rapid Mania phase as the Public moves en masse as Media starts giving it attention. This creates a self-sustaining burst of greed and delusion/fear. Near the peak people are convinced they have reached a New Paradigm where the old rules no longer apply, then a brief pop which people deny and are reassured by false starts before a catastrophic crash, Despair, then a final return to Equilibrium in the Blow-Off Phase.
Question: For extra credit, if the life of an investment bubble is so simple to identify, then why the hell do we have them?
Fear Factor
Yes Virginia, it is true that a collapsing bubble will cause you catastrophic loss if you purchased at the peak … and especially if you used leverage to do so. But this isn’t enough. Fear of loss or misuse of leverage could apply to any investment. Stocks go up and down, that’s life. But this does not mean stocks are always bubbles anymore than getting in a car guarantees you will be in a fender bender. The fact is that nobody likes losing money. I don’t.
The financial industry has a cute name for Fear Factor: “risk tolerance”.
They can’t call it OMG RISK because people will freak out. But hey, ‘tolerant’ is good, right? Let’s call it ‘risk tolerance’. Who said Marketing was a worthless degree.
The truth is that investment bubbles are rare. Not impossible, but rare. The tulip mania and South Sea schemes were famous bubbles but these happened hundreds of years ago when people openly screwed each other in smoky candle-lit rooms and carried daggers (or muskets) in their pockets. The stock market crash of 1929 was the result of a stock bubble, but we didn’t have another one of these until the dot-com/telecom meltdown of 2000, seventy years later. Then the housing bubble that peaked in 2006 a half decade after that.
The timing of these last two actually puts Alan Greenspan, former chair of the Federal Reserve, as having the dubious distinction of presiding over the central bank and guiding its monetary policies during not just one, but two major investment bubbles. Does anyone know how the French say ‘fuckingdee fuck flippity flip fucking idiot’?
No, I believe that most of the time the Fear people have when they talk about investing is not bubble fear but plain ole’ low risk tolerance. Since infotainment sources are echo chambers for institutional interests, they’re not going to get any warm fuzzies about bullion investing from them. These are people who only invest when they hear about it from 20 sources, vs. looking at the data themselves and making up their own minds.
Even more absurd (to me) are when people look to their peers for information, for whatever reason assuming they represent some broader consensus, before making a move themselves.
Ironically, this is the opposite of how ‘buy-low/sell-high’ actually works. If everyone around you is already convinced of the value proposition and has committed money to it, then you’ve lost the low-value part of ‘buy-low/sell-high’. Party on.
Bubbles are Three Dimensional. Here are my Three Rules for detecting whether you are staring at a bubble.
Bubble Rule #1:Just think about this for a minute: of all the talking heads warning of a gold and silver bubble, where were they during the rapid inflation of the housing bubble? Were they warning people to not buy a house? To sell their bank stocks? Were they jumping up and down begging people to sell their houses at the peak and move into rentals? No they weren't. So why the Johnny Leader routine?
Rule #1: Those who pronounce a bubble is currently here must show their track record with respect to predicting the last two bubbles (dot-com and housing).
Corollary to Rule #1: Those who deny a bubble must show why the conditions of a bubble are not met.
In fact I seem to recall these guys pasting on make-up and waving the pom-poms for housing all the way up, then denying its decline for a good year or two after the pop had wiped out millions of people and destroyed several banks.
And by the way, just how many of these pundits, policymakers and media celebrities apologized for being wrong? Offered a mea culpa or analysis of how and why their gold-plated analysis failed?
Lack of insight is especially egregious for those in positions of power, who wanted that responsibility and who ought to know what bubbles are and be advising the masses when they arise, but yet couldn't see one forming right in front of their face:
"Overall, while local economies may experience significant speculative price imbalances [in housing], a national severe price distortion seems most unlikely in the United States, given its size and diversity."
-- Recorded remarks by Federal Reserve Chairman, Alan Greenspan, Oct 19 2004.Chairman Greenspan gave this speech just about 18 months before the high water mark of the housing bubble was reached. It took him years after it popped to even admit error, and even then his admissions were qualified, parsed out in bits, and equivocal. Greenspan should at least have the decency to own up to his responsibilities and take accountability for his actions in a manner that Ayn Rand (his intellectual and philosophical mentor) would have demanded.
The fact is that bubbles, while rare, are hard for most people to see precisely because they are either in the party or trying to get in, which leads to the second rule:
Bubble Rule #2:
Rule #2: Thundering masses cannot see bubbles, because they are the ones who inflate them.
Corollary to Rule #2: If the masses declare an asset to be forming a bubble, then no such bubble can form.Just think about this for a minute. No, I mean it. Seriously think about it.
If the popular consensus believes something to be in bubble territory and acts in their own self interest, then this means there are not enough buyers for the asset and extreme price appreciation is not possible. Thus, no bubble. Bubbles by their very definition can only grow if investing mania for the asset class is triggered, pumping up the apparent face value of the asset in extremis.
In this scenario, the Thundering Herd creates radical price imbalances that the Smart Money sees and takes advantage of, buying low because no one else can see the bullion behind the bullshit.
Bubble Rule #3:
Rule #3: Bubbles require cheerleaders.
Corollary to Rule #3: If the cheerleaders are not cheering the asset, they're probably sleeping with the other team.
Is any further explanation needed?
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I would love for every reader to be in the Smart Money crowd. Don't be a follower, be dispassionate. Search for data, look at data. Look at who is giving you advice. Ask what their agendas are and why you should take them seriously.
Striking out in a new direction is scary, true. It flies against millions of years of human evolution, evolution that conditioned us to stick together and socialize our human experience. But when it comes to money we have to be willing to be the monkey that takes a nibble at undiscovered fruit and see if it is good for us. It is important to take chances because that is how we grow. That is how we learn. When it comes to money, that is how we move from being dumb money in the middle of the herd to the Smart Money that senses the opportunity.
In the final post coming up, I will be showing a few data points that show where Silver bullion happens to be in relation to its current and recent price points, supply and demand. I believe Silver is somewhere between the Smart Money and early Awareness phases, and odds are strong it will never form a bubble. At least not in fiat Dollar terms.
Peace out.
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