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Five Decades Of Asset Bubbles: Which One Is Next?

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Or maybe this is a trick question, and the answer for the "New Normal", when all central banks are coordinating on reflating the biggest asset bubble of all time, is "all of them"...

And some thoughts on the chart above from Obermeyer Asset Management:

The above chart shows that once every ten years or so, some investment theme becomes dominant and takes on bubbly proportions. What these dominant themes seem to have in common are roots in economic factors that morph into “truths” that take on a life of their own. These “truths” have self-reinforcing properties where market prices validate the “truth” and vice versa. This creates a virtuous cycle until market prices become unsustainably high, reverse themselves, and essentially purge the beliefs that created the risky condition. This is often a lengthy process.

 

The purpose of this commentary is not to explore the well-covered ground of how manias form and unwind. Rather, it is to highlight the role of psychology within investment markets and advise caution when conventional beliefs or “truths” begin to take shape. The reality is that there is no single truth that can be relied upon to make money in financial markets. If there were, everybody would be rich. Markets are driven by people, so psychology plays a big role in driving returns on any given day. But a recognition of some of the “truths” evolving within markets can help identify the causes of price trends, which can reveal risks and long-term opportunities.

 

One of the “truths” that seems to be evolving – as evidenced by how investors are allocating their capital – is that interest rates will stay low for a very long period of time. If this is true, what we’ve seen in markets is rational; if it’s not, many will be disappointed. One of the recurring themes that I heard at the Value Investor Conference earlier this month is that today’s environment is challenging for bargain-oriented investors. Many in attendance saw the Fed as a too-powerful force driving most stock prices out of bargain territory. While this may indeed be the case, there are almost always good investments to be made, especially in areas that are overlooked. The universe of stocks that are popular, that have obvious appeal and are easily understood is rarely fertile ground for bargains.

More here.


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