Bubble Watching

I always get a kick out of central bankers and market strategists who state they don’t see signs of market froth. How can that be? During periods of overvaluation, it can be seen clearly in prices, valuations, and yields. It can also been seen all around us in everyday life.

This morning I drove my son to school and took the scenic route along Ponte Vedra Blvd. It’s a very nice five mile drive along the ocean. The entire drive is littered with new homes or new homes under construction. These are very nice and very big homes that are being built where very nice and very big homes once stood. I call it the teardown bubble. Although driving through the teardown bubble is challenging given the number of dumpsters and construction trucks, it’s a worthwhile drive if you enjoy bubble watching (a hobby of mine).

During the last credit and market cycle, condos were sprouting up everywhere near the beach. This cycle is different as it’s more high-end homes versus condos. It appears the 1%’ers are trading in some of their gains on financial assets to raze the old and build the new. I suggest the Federal Reserve rent a tour bus and take a drive down Ponte Vedra Blvd before their next Fed meeting. After the tour, I suspect they’ll have trouble arguing their policies have not created excesses, imbalances, and inequality. At the very least, they will no longer be able to say they haven’t seen signs of market froth.

Shortly after I returned from my drive through Asset Inflation Boulevard, I came home and turned on the television. On the screen was a city’s skyline filled with construction cranes. At first I thought it was Nashville, or the Dubai of the South (thanks to a reader for the perfect description). But no, it wasn’t Nashville, it was London. Whether it’s Nashville, London, or Ponte Vedra Blvd, in areas populated with beneficiaries of asset inflation and credit growth, you will find significant levels of construction activity, and yes, construction cranes (a historically reliable sign of cycle froth).

Signs of this cycle’s excesses are obvious, in my opinion. For investors fully committed to the current cycle, these signs are either invisible or believed to be sustainable. I’ll admit, the duration and durability of this cycle has been impressive. And with help from the “unlimited” global central bank bid, maybe it can last longer. I really don’t know, but I do believe signs of froth are clear. Similar to past cycles, identifying these signs has been beneficial in avoiding unnecessary losses when the boom inevitably turns to bust. 

Picture of London below. Out of curiosity, I placed it above a picture of Nashville’s skyline to compare. It’s fun to play count the cranes!

Have a great weekend!