'Bubble': The Default Adjective of Lazy Pundits
Back in the early part of the 20th century when the automobile industry was in its infancy, there were over 2,000 car companies in operation. Notable there is that only around 1 percent survived.
This statistic from over 100 years ago is worth bringing up in light of the frequent - and very lazy - use of the word ‘bubble' by market pundits. It would be hard to find a more worthless word, one logically devoid of meaning, than this modern adjective used with great constancy by those who comment on the markets. Seemingly lost on the serial users of this shallow waste of breath is that if there's a ‘bubble' to speak of, it concerns the excessive use of ‘bubble' itself to seemingly describe any market move upward.
Looked at through the prism of the automobile industry, had today's pundits been around as cars began their ascent, ‘bubble' would surely have dominated the primitive headlines. Who cares that the car was a staggeringly transformative innovation, one that birthed incalculable human progress, the fact that most auto firms failed would have neatly fit their indolent approach to major economic leaps that almost by definition leave a lot of failure in their wake.
More on the above in a bit, but it should first be said that the very notion of a ‘bubble' is a logical impossibility. Implicit in such an adjective is that markets are filled with buyers only; those buyers mindlessly purchasing assets on the way to nosebleed valuations. But as the italicization of ‘purchasing' hopefully makes plain, for there to be an exuberant buyer of stocks, bonds or any other asset, there must be a seller possessing a view of those same assets opposite that of the buyer. In any market, bubbly, wild-eyed bullish optimism is only able to express itself insofar as flat, sad-eyed bearishness is similarly given a voice.
Very importantly, it works much the same way in reverse. Looking back to 2008, how unfortunate it was that a mindless SEC banned short selling on 900 different financial stocks. The SEC's ill-conceived idea then was that the markets needed to be cleansed of excessive bearishness about the financial sector. But for a short seller to sell shares short, he must find a buyer who thinks those same shares will rise in price. Taking this further, it can't be forgotten that short sellers are ultimately buyers. Indeed, for a short seller to profit from his bearishness, he must eventually re-enter the market in order to buy the shares initially borrowed and sold. To ban short sellers is to erase a massive reserve of buying power that will eventually re-enter the market in order to put a floor under stocks.
Moving out of stocks, the popular website Zero Hedge recently ran an article about total debt in the U.S. (government, businesses, individuals, etc.) having risen to nearly $60 trillion dollars. One repost of the article came with the excitable headline "We Are Living In the Biggest Debt Bubble of All Time." Scary stuff until the halfway sentient among us remember that borrowing is matched by saving, by definition. For there to be a ‘Biggest Debt Bubble' there must also be a ‘Biggest Saving Bubble.' Do all of you readers mindlessly lend money to those whom you think can't pay it back? The question answers itself.
Some will naturally respond that "this time is different," that quantitative easing (QE) allows for borrowers without savers. Oh well, without defending the abomination that is QE for even second, the Fed's economy-sapping buying of Treasuries and other mortgage debt hasn't been an example of money printing; rather the Fed has been borrowing money from banks at 25 basis points in order to buy up those assets. In short, even the Fed's horrid capital misallocations have been backed by savings.
Looking back to the period during which ‘bubble' reached full flower, meaning the internet ‘bubble', the simple truth is that the internet, much like the car 100 years before it, was an utterly transformative economic advance. If this is doubted, readers need only think back to how we worked, communicated, shopped, and watched movies and tv in 1990 versus today. The difference is staggering, and because it is, it was only natural that all manner of unsuccessful ideas would be funded in the technology space. When we consider what the internet ‘bubble' wrought, including a very shallow downturn as the markets were cleared of some admittedly bad ideas of theglobe.com variety, the only sane response would be to wish for more of these ‘bubbles' every few years.
Indeed, as George Gilder noted in his masterful book Knowledge and Power, "crises may be growth spasms." Gilder's point is that economic advancement is about the leap, and it was during the internet boom that massive amounts of saving and investing gifted the marketplace with voluminous information; some of it good, some of it great, most of it profitless, but all of it providing investors and entrepreneurs with greater clarity in their relentless pursuit of returns. We're once again better for there having been an internet boom marked by stupendous failure in much the same way that the 99 percent failure rate among automobile companies in the early 20th century fostered a major leap forward in transportation technology.
Are market signals sometimes distorted? Yes they are. Investors in stocks are tautologically buyers of future dollar income streams, and with the latter in mind, it's no surprise that stocks soared in the ‘80s and ‘90s when the dollar was strong. Conversely, it's no surprise that stocks were flat in the ‘70s and 2000s as the dollar collapsed, but that commodities and other tangible forms of wealth measured in those wilted dollars soared. In each instance marginal concepts were funded that no doubt would have been ignored had the dollar been stable in value, but far from a sign of a ‘bubble', what this really tells us is that governmental monetary errors distort capital flows in ways that destroy limited capital, and thus restrain our ability to grow.
Looking at the 2000s and the alleged housing ‘bubble', a falling dollar made assets least vulnerable to the dollar's decline like housing relatively attractive to buyers, and a safer bet for lenders. Government subsidization of housing surely added to the market distortion, but lest we forget, frenzied buying of property was only possible insofar as others saved with abandon. In other words, for every dumb mortgage written, there was a saver not rushing into housing with his dollars, and whose parsimony made the loan possible. Going back to government subsidization of mortgages, as awful as it was and is, even there governments are only able to dole out access to housing insofar as they fleece taxpayers of their savings first. Exuberance is always balanced by thrift, and very sadly, sometimes by force.
Considering the eventual housing crack-up, what's too easily forgotten is that just as technology investors adjusted for laughably bad (at least in hindsight) internet investments made in the early 2000s, so was the banking and mortgage industry correcting egregious lending mistakes in 2007 and 2008. There wasn't a huge housing correction, Michael Lewis observed in The Big Short that defaults on mortgages actually took flight when housing prices merely stopped rising, but rather than let the market fix itself (including allowing institutions very much exposed to housing like Bear Stearns to fail), the federal government intervened and turned a correction into a crisis. In short, no ‘bubble' was popped; rather a natural market correction always and everywhere balanced by buyers and sellers, along with lenders and borrowers, was robbed of its useful purpose by hubristic politicians.
And just as there's always a seller for every buyer, there are negative tradeoffs to nearly everything that's good in life. One negative tradeoff to the rise of the internet is that words have arguably been cheapened. This may explain the mindless and excessive use of the word ‘bubble'; one that pundits use with obnoxious frequency presumably based on the certainty that even a stopped clock is right twice a day.
Still, it would be nice if those so eager to attach ‘bubble' to nearly every piece of market commentary might sincerely reflect on the impossibility of what they're so certain about. ‘Bubbles' quite simply aren't.
