Bubble Markets

People think I’m liberal. I don’t fully earn that label. I am conservative about many things, and liberal minded (open, exploring, ready for fresh discoveries). I am also practical. That roots me in centrist positions on social issues. How do we as a society manage through the many social issues we face daily? We cannot create ‘one size fits all’ solutions. They don’t exist in the main.

So, to manage social issues and governance processes, we need to borrow ideas from conservatives, liberals and middle of the roaders. This sharing is also a great way to best understand all of the competing ideas out there. How can we be against something we don’t know anything about? We need to read and research many things before making up our minds on solutions, positions, and political support.

In my mind that makes me a centrist.

One thing I’m conservative about is money. Prices. Value. Efficiency. Fairness. Those sort of things.

For example, I’m aghast at the Bitcoin fad, or craze. Of course, I don’t understand the craze, but I know that the value is not based on anything actual or real. Expectations, maybe, but not actual, real things. What was once a $1 Bitcoin, is now a $10,000 Bitcoin. The same one, actually, just priced higher because someone is willing to exchange other value for it.

The Bitcoin fad is an example of a bubble. A bubble is the appearance of value without any backing. The bubble is filled with nothing but air. Bubbles tend to deflate quickly and without warning. One moment they are there, and whoosh, they are gone. Zilch value left.

We have observed fluctuating prices for used automobiles in recent years. The more cars on the market at any one time, the lower the prices; supply and demand, remember? If the supply tightens, then the price for used cars rises. Same for new cars, too.

And for housing. There are exceptions to the rule – hot neighborhoods, specific hot home designs, and other features – that will press prices higher in a market that is generally down. If the supply of homes increases quickly, price competition generally pushes prices down. The opposite is also true: tight supply of homes on the market, prices rise. Of course the size of the buying market is a feature, and those folks have to have a supply of cash at hand to buy the house with favorable mortgage terms. Not all of these aspects track together, but often they do.

We had a housing bubble prior to 2008 – too many people chasing after houses and bidding up their values. When the recession of 2009 began, many people walked away from the market and selling any home was difficult. Many people lost their homes because they lost their jobs and could no longer pay the mortgage payments. The bubble burst and many people lost their homes and equity position. A lot of people remained in their current homes and the market nearly collapsed. Mortgage defaults were plentiful and banks tightened their lending standards. The result was a decline in mortgage availability. And a reduction of even more buyers. Prices on homes dropped like a rock. The bubble had burst. Now many years later, we see evidence of a new housing bubble appearing. Let's watch where this one goes!

The stock market is also subject to value bubbles. When too many people buy stocks of fixed supply, prices rise. If expectations of growth in the economy are high, prices rise. Today the Dow Jones Industrial average is over 26,300 points. It rises by 50 to 100 points daily. This is not normal. Stock prices have soared in recent years; and buyers continue to push prices to yet higher levels.

If little value is included to match stock price gains, then a bubble has formed. There is no telling what event will cause the tide to turn and cause prices to drop. A drop of 100 points is not an adjustment. A bubble bursting would cause a price decline of 500 to 1000 points in one day, and possibly repeated for a series of days.

In my estimation, the Dow Industrial average is overpriced by 5000 points. A bubble bust would cause the market to drop from 26000 points to 21000 points. That lower level is still high historically and represents a clearer measure of market value.

Conservative thinking would cause investors to be cautious about their stock buys and selling. So far the expectations are high and going higher. Not a conservative point of view. There is nothing present to support higher stock prices. The opposite is true, yet a market correction is still absent.

Underlying causes for a market correction abound. More on this in coming days.

January 26, 2018