Bob O'Brien
Head Instructor
bobrien@mywealth.com
We have had a Stock Market Bubble, Credit Bubble a Real Estate Bubble and more. We now have a Treasury Bond Bubble which will most likely lead to a Gold Bubble. Economic asset bubbles are nothing new but having this many consecutively is new…and it is part of a new economy that you need to make certain you understand.
What is an economic asset bubble? It’s when an asset value becomes blown way out of proportion and inconsistent with the underlying financial and economic statistics. In other words it just doesn’t make any “financial sense” why people are willing to pay so much for an asset and yet keep doing so. There are three main causes involved and they are: too much loose credit, tons of speculation, and excessive optimism.
Did I see these three main causes in the recent Real Estate Bubble? Absolutely! We’ve obviously seen the loosest credit in the history of the world with liar loans and NINJA loans (NINJA= No Income, No Job, No Assets). In addition, we’ve all seen tons of speculation, where everyone was buying and flipping real estate.
Let’s not forget “excessive optimism”. We saw a lot of that too! People never questioned the stability of real estate and slept good at night assuming it would go up and up forever. Why question it? After all, most people have owned real estate, so why not just keep talking it up!
Look to History and Let it be Your Teacher!
Did these main causes exist during the stock market bubble of the 1920’s? They did indeed. We had a lot of loose credit and tons of speculation in the stock market. People at that time thought that stocks would go up and up forever. History has repeated itself in many ways, but with a couple of differences. There was a real estate bubble that caught us off guard this time as opposed to stock market bubble formerly.
There are a lot of economic factors that we cannot control, but excessive optimism is one we can control individually. You have to stop and ask yourself when you have a great idea or insight, “Have millions and millions of other people already thought of this? Am I running with a bad herd? Am I missing something here?”
I remember the late 90’s stock market bubble very clearly and I was still a relative rookie financial planner at the time. I was trying to warn people that they had way too much in equities/stocks. People would become incredibly defensive with me. It was like I insulted them or something. I was just trying to keep them from making a big mistake. By the way, sometimes this was the management at some of the financial services firms! Do you have a question about the stock market or real estate market for me?
I saw the same thing a couple of years ago, with real estate and telling people that we are probably going to see some major dips in real estate. People that were buying big, huge homes (which they really could not afford) would say… “It doesn’t matter if it goes down, it will come back in the long run”. There is a certain degree of truth to this, but there is also a certain degree of truth to the fact they if you break your arm or leg it will heal itself, in time. I would rather do a couple if precautionary things first, and make certain that I don’t break my arm or leg in the first place.
Volatility destroys your rate of return over the long run and makes it very difficult to do good financial planning. Check out a blog that I wrote on this topic.
One of the things that I think is great about our foreign currency course is that it helps you to identify trends and understand money better with a universal view. I wouldn’t recommend that you start trading currencies (or stocks for that matter) unless you have a rock solid retirement plan in place first. However, taking the course will help you do that better too.
Please share your comments below and send me an e-mail for articles that you would like to see written. bobrien@mywealth.com
Sincerely,
Bob O’Brien
Sr. Instructor
