Avoiding the Investment Bubble

Hardly anyone talks about real estate these days without uttering the word, “bubble.” Sure, there’s the contrarian view. And that view says, “When everyone believes something will happen, that’s when it won’t.”

But the contrarian view is certainly not infallible. Why, back in the late 90s, even old Greenspan said stock market investors had “irrational exuberance” coming out of their ears. And despite that and repeated market warnings involving the word, bubble, stocks still “popped” with a vengeance. Which brings us back to real estate. And gold.

According to a CNN Money article, “there are about 15 markets (in the U.S.) that are vulnerable to a housing market correction. These represent about 35 percent of gross domestic product, the broadest measure of the nation’s economy.” “A significant correction in consumption spending in these states is bound to have significant effects on national growth,” said Thomas Helbling, an economist at the IMF in Washington.

So…if housing does come tumbling down around us, given the dollar’s weakness, what might the outcome be? No one knows for sure. Logic says it won’t be pretty. And you’d probably be foolish to start riding a “Good Times Ahead” bubble. That’s one bubble that’s likely to have an extremely short life span.

Given the activation of our inbred sense of caution — a wise gift from our Creator, by the way — we should take full advantage of gold’s ability to head north even when everything else is heading south. Things could always be worse: Imagine not having an investment that heads north when everything else is heading south.

Mother of all bubbles

“Bubble talk” is all around. Usually talk like this is the result of some market going up indefinitely or irrationally. Or both. We stand alongside the presumed bubble, shake our heads and make grave pronouncements.

But that doesn’t mean the bubble isn’t about to pop. Take real estate, for example. Probably the most notable of real estate bubbles is found in California. Any housing market that’s 40% higher than it was two years ago probably qualifies for “bubblehood.”

Even so, the “mother of all bubbles” is not real estate. According to Tocqueville Asset Management’s John Hathaway, “the mother of all bubbles” is the U.S. Treasury market. And he has some scary things to say about it. “Rising nominal interest rates in U.S. Treasuries will inflict severe collateral damages on subsidiary bubbles, including housing. He believes gold is positioned to vault ahead of troubled currencies soon. Especially since gold supplies are “extremely, extremely tight.”

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