patrick.net

Bubbles reflect a very basic nature of how nearly all people make investment decisions.

They invest based on momentum, track record. That is to say, they invest in things that have already proved that they are going up. So the more the item has gone up the more convinced people are that it will go up more. And the faster it goes up, the faster they rush to get in on it.

Their exuberance blinds them to the risk, as the crowd rejoices in the easy money.

Bubbles are very profitable for those who get out in time.

To paraphrase Warren Buffet:
Be greedy when others are fearful, and fearful when others are greedy.

So when the crowd says you can't lose, it is probably about time to start selling.
When the crowd says it is a bad investment, it is probably time to start buying.

P2D2 says

That could be true for your area. But people near big metropolitan areas do rent homes

I think it's more of a West Coast thing. I've lived in Midwest and East Coast cities and people don't rent houses very often. But it does seem to be common in CA.

Its because of prop 13

marko says

if we go back longer than 30 years and chart other bubbles in different ranges of time.
Say between 1910 to 1930

Or 1610 to 1930.

http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds

Yes. You can trade the crash. That requires a very brave bet, as it is easier to be right about the ultimate outcome than it is to be right about the exact timing. You could lose a lot of money waiting for the crowd to stop their exuberant run.

As Keynes once said:
Markets can remain irrational longer than you can remain solvent.

I prefer to bet the long side only, sell at or near the top, and then watch the destruction from a safe distance.

How about these bad boys?

Here's the Sugar Price

And Cocao

More charts showing that commodoties are on a run.

General inflation will not be far behind.

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

In the SF Bay Area we been in a 10 year long RE bubble, we peaked in Q1 2007.
So thats only 3 years.. but a long way to go.

^ I know that chart well. I was FOB in the south bay in mid-2000, and saving for a downpayment for the first two years. Then I caught a layoff and became a spectator 2003-2004. Thanks to reading CR from 2005 I knew we were in the end-game. I thought a repeat of the 1989 spindown was the minimum, and once I learned about Casey Serin in late 2006 I knew things were going to just blow up, due to all the outright fraud.

Down here though, I think GOOG and AAPL are distorting things a lot to the upside. The SCV was subdivided out a generation ago and all the convenient places are built out as much as they're gonna be. As long as prices are falling more than my annual rent I'm a happy renter, but I'm going to have to buy sometime!

Bap, this is obviously not the first bubble built on leverage. The final burst of most stock market and commodities bubbles is a combination of institutional leverage and J6P enthusiasm. That final stage of the rocket usually requires the banks to loosen up on their lending standards, but most do because their advisors see the bubble as a "can't lose" proposition.

For those who love bubbles, I recommend reading some Nassim Taleb. He's made billions betting for black swans, because they happen more often than people are willing to admit.

Happy to report that the admission rates for H1N1 at my hosptial are WAYYYY down, not sure if we even had one this week! Keep taking care of yourselves, wash your hands!, stay home if you are ill, and vaccinate if available to you.

"Is this the first bubble built on (almost enitirely) debt?"

Debt has been a major factor in many bubbles - perhaps all of them.

Tulips: 60x in 3 years.

That's 6,000%

...or about 1,700% per year.

Now, that's a bubble!!!!

well ... damn, then fixing the easy-debt issue wont help end the bubble cycle ... or will it?

IQ testing for borrowers ... and voters? lol. But, seriously, will demanding full recouse loans, including debters prison, help end bubbles?

"But, seriously, will demanding full recouse loans, including debters prison, help end bubbles?"

Only to the extent that the borrowers believe they might lose money, and have other significant assets that could be put at risk by the recourse. I suspect that the fools who thought that the easy profits were a sure thing would not have been concerned about full recourse.

We forget (actually, never educated so), but non-recourse loans were established by law with the aim of curbing industry abuse of the public rather early in the 20th century.

The theory was that putting the risk on the banks would result in better loan underwriting. It worked, until industry took over government in 2001 and the dogs were again allowed to run wild.

Heh, maybe that's where "Capitalist running dogs" comes from : )

"We forget (actually, never educated so), but non-recourse loans were established by law with the aim of curbing industry abuse of the public rather early in the 20th century."

The change was made after the abuses during the Great Depression, when banks would forclose and sell the property to themselves (or a related party) for a minimal value, while still holding the borrower on the hook for the remaining loan amount (loan deficiency).

The law was a consumer protection law in California, and various other states have also adopted similar laws. The idea was to protect the consumer. I doubt that the state legislators cared much about any effect on loan underwriting. The problem they were solving was abuse of consumers by mortgage lenders.

Bank underwriting quality has slipped during each RE boom over the decades. Then the lenders become more strict again after each meltdown. It is a cycle in loan underwriting.

But the recent bubble was the first time that the mortgage lending was financed mostly by loans sold 100% to unrelated investors. And financial market was a limitless source of funds.

With the lender no longer retaining the loans, they soon focused on the fee income from the volume of loans, rather than the risk of the borrower.

In addition, the underwriting process became much more formula driven and credit score driven, through automated underwriting programs and the standardization of underwriting criteria.

Selling the loans to third parties as a standard procedure created a moral hazard. It became someone else's risk. This moral hazard led to not really caring about the risk, and the exuberance of easy money started a gold rush to originate and sell as many loans as possible.

The investors who bought the loans grossly underestimated the deterioration in underwriting, and would buy almost anything because they thought the risk was minimal. Everyone was blind to the risk, and just wanted as much as they could get.

Government did not control the underwriting process before or after 2001.
It was always controlled by the balance between greed and fear.
And for a few years the loan "underwriters" had no fear.

If you can rent it for $635 and it's really only $60K, I'd say it's a bargain. Buy it.

on a scale of 1 to 10. area: 1 close shopping: 1 schools: 3 crime: 1 demographic: 1 age of infestructure in that area: 1 The only way a place in that area stays rented is renting to welfare folks. If the place does not qualify for Section 8 you will not get much for rent. And Section 8 gaurentees gangsters and/or drugs in the house. In this area you will really be scrapping the bottom of the renter pool. And they can not, and will not pay +$600 a month to live in south side Merced if they earn their money working. See if the Merced SunStar police calls are searchable. That area is called south side. Any street number lower than "16th" and any street letter between "B" and "V" and any street off of W. Childs. There was a sattelite police station put in over there, but it's not staffed like you may think. It is the absolute worst area in Merced City limits. Call the police station and get a second opinion. The Laughboro area is next worst. But, if you live out-of-area and dont care who you rent to and what kind of situation they create for the neighbors and area, then you may be ok to buy this place and have tax-payers pay your note through welfare and Section 8.

^ another recent innovation was tranched CDOs, which converted a stunningly large percentage of risky seconds into AAA-rated investments.

This is why I assert prices were pushed to their heights not by the activity of the Fed 2001-2003 but by the inactivity of the Fed 2004-2006.

Problems cannot be solved by the same level of thinking that created them.

The financial market guys were full of innovation, finding new ways to slice and dice the mortgages and repackage them into securities of varying content and complexity. They thought this reduced the risk by mixing and spreading the pieces around, and by layering the risk into sequenced traunches (slices).

From what I could tell from talking to these guys at the time, they really did believe that this made sense, and that it did reduce the risk. They had statistics and models made by math geniuses to prove the validity of the concept.

While I never thought it would turn out as badly as it did, I also never bought into their models and arguments.

But the rating agencies did buy the story and gave AAA ratings to most of the pools of doggie doo mortgages sliced into those mixed, layered traunches. Of course, every doogie doo pool had a few small layers that were sopposedly taking all of the risk, and those traunches did get lower ratings, sometimes as junk.

Everyone was so intent on moving the money, and so blind to the risk that their only real concern was increasing their volume of the stuff. And increase they did.

Like they say, be careful what you wish for.

If we can follow the logic of the tinfoil hat crowd, the downswing in reported h1n1 cases are a result of the republicans/conservatives somehow fixing the numbers. There never was a problem with h1n1. See, what happened was the world leaders got together, decided that they needed a diversion to the economic crisis crippling our world, so they came up with a pandemic that killed little children (the ones that kill old people don't look as cool on the posters). But President Obama didn't play - he decided that, if they were going to create a pandemic, he would withhold the vaccine and therefore control the world. But THEY (you know, THEY) saw it coming, and paid a bunch of people to not go to the ER with the pretend symptoms of the non-existent threat to all of us. Those SOB's are always one step ahead of us, damnit! Now, all they have to do is kill Dustin Hoffman's character and the scenario is complete.

"I doubt GLD is falling below $100. I think we go sideways for 2 weeks tops. Once we’re past New Years, it will double in 6 months.

The safe way to play this bubble is to wait until the second peak after the bull trap, then short the hell out of the gold market in every way possible. That way if I’m wrong, there’s no danger."

Maybe I need some clarification here. Is your position now that Gold bubbles and then collapses before the dollar severely drops off a cliff? And if so, what happens after your hyperinflation call?

How about Silver as well?.

@ellie,
you need to rent Ghost again and watch how Patrick Swazeee does it.

TOT, who plays who in the movie of you writing this book? Wayne "The Rock" would be a pretty close Bap33 match. And my woman should be Ashley Judd. It should be rated "R". Anyways, who plays who?

Ashley would play me. Her hair would be blonde with roots badly in need of touchup.

You - the Rock? Hmmmm...interesting. Of course, I wouldn't be the Ellie you've grown to love & loathe if I didn't point out that his name is "Dwayne," not Wayne...

So who plays you in the movie, tpb? And who would do the soundtrack? I hope it's someonce cool like Don Henley or someone like that. When you're scouting locations, I'd be happy to travel on your dime to check it out for ya.

Ya, I'm a giver.

Bap33 says

Wayne “The Rock” would be a pretty close Bap33 match. And my woman should be Ashley Judd. It should be rated “R”. Anyways, who plays who?

Yeah and Ving Rehms plays me, and Ted Danson plays Obama.

It would defiantly be a Tom Waits/Kanye West colaberation sound track.

Well we chose Tom Waits, we aren't quite sure why Kayne keeps showing up at the studio.

I'm telling you .... my woman IS really close to Ashley Judd .. only mine is shapped much better, and she likes me - a great quality. Me as The Rock is not the stretch you may think .... just need some grey hair colored and more cardio and sit-ups. If it's a musical you may want to have me played by Arron Tipon, but only after a heavy workout routine and a hair cut.

btw, why take just one side of a hedge? This situation is so unpredictable already. It's impossible to tell if inflation expectations are already built into the gold spot price, or if there's too much leverage in play, or if there's more dry powder on the sidelines. It's easy to just box the price +/-15 to 20% with options, on the theory that it's going to make a big move one way or the other. What I would find suspicious is if gold stabilized at this particular price point. Why take a 20:1 payoff bet in one direction, when it's possible to take a 10:1 payoff bet in both directions (essentially betting the magnitude but not the sign)?

Brand says

It’s easy to just box the price +/-15 to 20% with options

Exactly which options? Maybe I'll try it.

I find it interesting that with all of the graphs, there isn't one for the M-3 money supply. Probably because the Federal Reserve, after this long period of endless printing paper money, it no longer makes this information available! Do you wonder why? What we really have is a situation in which the U.S. Dollar is the bubble ... not gold. With paper money, it takes the same amount of ink and paper to create a million dollar bill as it does to create a one dollar bill. Not so with gold. Because of its limited supply and difficulty in mining, gold has always been valuable. Paper money has been found to be worthless in over 300 cases in history. In U.S. history, it's happened at least 3 times ... the Continentals, Lincoln's greenbacks and the Confederates all became worthless peices of paper.

staynumz says

That pretty much sums it up. 10,000 dead from swine flu and there is still a big “if” the vac is available to you. Good job, brownie.

I agree. And where is that perpetual motion machine that I was promised too?? WTF are all those damned politicians doing up there????

I am not surprised H1N1 is declining. I am pretty sure I got it back in March. I was the sickest I've ever been in my life, but "spend the day sleeping" sick not rushing to emergency room. My toddler had it too, hit 105F peak and then was fine. Neither of us were however TESTED for this flu as I understand the test has to be performed while you are actually pretty sick and who wants to rush into to the doctors office and sit around with a bunch of sick people when at the time all you are thinking is "it's just a regular flu". In retrospect though it seems obvious to me. I think there was a lot more of it floating around earlier than anyone realizes because it was unreported. It was pretty bad for us, and I can see how it could kill people that were perhaps weakened by some other factor. Also what vaccines were issued do have some herd immunity effect preventing it spreading super-fast now. My toddler got the vaccine back before Thanksgiving just to be safe.

Also keep in the mind that the H1N1 test was not that accurate so who knows the actual numbers. And now it's regular flu season aka seasonal flu. The number of folks who got this vaccine is high so lets hope it correlates to a mild season. Wash your hands!

More Bi-Polar economic stories in our daily news.

There will be reports of adjusted last quarter earnings, along side sales at all time low.

GDP is up, Two major auto makers go under or get acquired by Renalt.

Home prices are up and so are mortgage aps, Obama is suing the banks for not lending.

Hell I think the Fed and Banks have got their groove on now. They are just learning this new system. And you know Goddamnit they like it! This is some easy money, they've been making money hand over fist all year. And as long they can continue like this they will indefinitely. For them the economy is fixed, well actually it's economy 3.0, it's nothing they nor we've seen before. But it affords them the ability to shuttle Billions and Trillions around the globe, it might not put a penny in your or my hands. But it makes them enough to pay back debts that would have taken nations years by the old system.

For lack of a better phrase, "We're stuck in stupid"

and as long as they can get away with it, and the Fed chairman has to be "ASKED" to step down. Then this party is on!

Yea, because all of the extra doses hanging around out there don't disprove your theory that there aren't any doses available and it's all a big conspiracy. And it's "heckuva job, Brownie." In case you're not informed (evidence has been to the contrary), this was something that george bush said immediately after hurricane katrina decimated the city of new orleans - and michael brown, who was previously a director of a horse show circuit and an obvious political appointee of FEMA, and after which disaster he was replaced but given a lucrative contract by - you guessed it, george bush - bungled the rescue efforts and caused needless death & destruction. There's no similarity to the H1N1 flu crisis, which has a vaccine of which there is a surplus in many areas.

I dunno, I think a lot of people were talking about gold last year. I think the 1970's were a huge moment when a lot of things were happening at once that will never happen again. We went from a gold standard to a fiat system. Now we're at a fiat system. What's to stop the IMF/Shadow Empire from dictating the price of gold the same way FDR simply told everyone what the new price would be?

people from all parties recognize the tragic "downside" of bubbles and as a result are in agreement that to THE FED would be in all Americans best interest.

May I suggest 'End The Fed' by Dr. Ron Paul? Happy reading.

It looks more like silver is following the channel in the below picture. It bounced off of 16.80 and still holding above 17 while GLD did go to 111 and came back to 112. I am going to place a bet on SLV if it bounces from 15.90, I would unload it on 19. GLD, I will be comfortable to put my money if it touches 96-97 range. Lets see.