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URL:  http://boards.fool.com/quot-one-peculiar-legacy-of-the-financial-30525096.aspx

Subject:  Re: No Bond Bubble Exists Date:  2/5/2013  7:03 AM
Author:  FastMike Number:  415091 of 449366

"...One peculiar legacy of the financial crisis is that, among the financial commentariat, there is a tendency to see a bubble whenever the market for a particular asset rises..."

Dear(est) PM:

Check out this quote from Bloomberg Businessweek, circa 2005:

"...I don't foresee any national decline in home price values. Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down. The last consistent drop was during the Great Depression, when the unemployment rate got up to 25%, or five times the level we're at now..."---- Freddie Mac Chief Economist Frank Nothaft,

Taking the other side of the argument was economist Dean Baker:

"...We've never seen this sort of run-up in home prices in U.S. history. In the past, home prices have always moved pretty much at the same rate with inflation's overall rate. But in the last seven years, they've outpaced the rate of inflation by 60 percentage points. This kind of run-up becomes unsustainable...I don't think the housing market will follow exactly the same pattern, but in the case of the Nasdaq bubble, in February of 2000... people were having this same conversation, but were more focused on the fact that prices were rising more rapidly than ever..."

Here's the link to the entire article:

http://www.businessweek.com/stories/2005-06-21/housing-bubbl...

Notice how the anti-bubblist is quoted with certainty, while the bubblist back tracks a bit by implying that it wouldn't follow the exact same pattern of the Nasdaq bubble, (although one could argue that he was, in fact, spot on. The housing bubble was far worse.)

It seems to me that a bubble is a bull market until it bursts. The problem is that the run up has a psychological dimension to it. No one wants to say, "GET OUT" for fear of being ridiculed as the market continues its run up, or worse, have their clients move their money elsewhere.

I even have a name for it: Pompeii syndrome. There's a known volcano, spitting smoke and fire and the residents who live under it are in denial. I'll bet there was someone there at the time, (speaking to an ancient reporter) saying something like, "...look, if that volcano ever erupted in the past we'd've uncovered signs signs of it by now. But we've dug this place up from end to end without any evidence, whatsoever, of a disastrous past! Look how much it's been built up! It's one of the best resorts in the entire empire...".

The counter argument would have gone like this: "...well, it's spitting smoke and fire. It's clearly in the beginning stages of an eruption. However, it'll probably give us a scare for a few weeks and then blow over...".

But while we're on the subject of 'sanity check' I'd like to add that the bubblist are forgetting something very, very important. I'm hearing many interviews saying that when money starts coming out of bond it'll go into stocks.

How soon we forget! From the begining of the vaunted 'stock market recovery' Bond prices have risen as well as stock market prices as well as commodity prices as well as inflation hedge prices as well as,... well, as well as everything else!

It wasn't a one month or a couple of month abberation, this across the board tandem assent of markets has gone on for years, and has gone on with global central bank engineering! Think about the leveraging relationships, the new structuring of institional portfolios, the new struction of currency relationships, default protection, central bank balance sheets, bank balance sheets and on and on. I emphasize, all asset markets have had more than four years to restructure themselves on a engineered central bank foundation.

So, without further ado, I'll say that this isn't a bond bubble ready to pop. This is an asset volcano ready to explode.

Your insane Fool,
FM
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