There is little question that there is some kind of asset bubble that has been created by the Federal Reserve. The Fed has quintupled the adjusted monetary base since the fall of 2008.
While much of this new money went into excess reserves at the commercial banks, it is still monetary inflation. It has served to bail out the banks, fund deficits by Congress, and misallocate resources.
Consumer price inflation, as measured by the CPI, has been tame. But this was also true in 1929 before the stock market tanked and the Great Depression came. The monetary inflation resulted more in asset price inflation, rather than consumer price inflation.
I see the same scenario now with stocks. I really do believe we are in a stock bubble. I am not saying this is just like 1929 because there are major differences, such as the existence of the FDIC.
Even if this were comparable to the 1920s, we may not be in 1929 yet. We may be in 1927 or 1928. That is the thing with bubbles. The mania can last for a long time.
I thought the Chinese real estate bubble would have popped by now. And while there has been a slowdown there, it has not yet come crashing down yet.
There is a quote attributed to Keynes where he said that markets can remain irrational longer than you can remain solvent. I think this is good investment advice, particularly in times like today.
I am not recommending a big position in stocks. I am quite fearful of stocks right now and trying to warn people. At the same time, the bubble may go for another major run before things turn down. Maybe we will see Dow 20,000 first. Maybe it will be even higher.
This is not at all a prediction. If I had to bet, I think the market will go down this year. But again, timing is difficult, especially when you are dealing with bubbles. That is the problem with bubbles. It is a mania and you can’t really use rational thought to bet against it. A mania defies rational thought.
In terms of real estate, I am not too fearful of a bubble. It is certainly quite possible that real estate could go down 10 to 20 percent if we hit another recession.
There are a few areas where I would be worried. New York and San Francisco come to mind, where real estate prices are sky high. There are also portions of Canada, such as the Toronto area. Of course, I already mentioned China and its real estate bubble.
There are certainly good reasons why prices are higher in some big cities, but it just makes it more risky to own real estate there.
In most places in the U.S., you are probably going to be ok if you own real estate, as long as you aren’t trying to flip something. The best test is to compare rents to mortgages. If you can buy a place for less than 20% down, and the rent will cover your expenses (mortgage, taxes, insurance, association fees, repairs), then you shouldn’t worry about a bubble.
When the housing bubble popped from around 2007 to 2010, rents did not go down that much. They went down a little, but nothing compared to prices. So if you are buying an investment property and you can get positive cash flow, you shouldn’t worry about a housing bubble as long as you plan to keep the place for a while.
I think real estate is a better investment than stocks right now. In a couple of years, they may both be attractive investments if the asset bubble pops. At that point, some people may give up on stocks. That will be a better time to buy them.