bubbles

It is interesting if not a little disconcerting to see the way investment capital has moved around sectors in the last 10 years creating both opportunity and a mess to clean up.

The accumulation of individuals and firms is always seeking a return as both a source of income and a hedge against inflation or price level changes. That means stowing money in the mattress is not an option very many people take. As investments are made in stocks or land or other instruments, the money is available to create value, build new business and stoke innovation.

Problems arise as the competitive nature of investors coupled with the near instaneous availability of information via broadband unleash an ever increasing search for higher returns even when they have to be created by ever more risky ventures or enablers to investment (such as the zero down, interest only mortgages of the housing bubble).

     There are more bubbles floating around the earth today than I have noticed in my entire career.  Bubbles begin with legitimate economic opportunity but end up crowding out legitmate functions and market signals, resulting in all sorts of distortions and misallocations of resources.  They start harmlessly enough where opportunity exists, for where opportunity exists, investment is attracted to capture a return.

     A bubble happens when capital overpopulates an opportunity and drives its trading value higher than its fundamental economic value.  Since all deviations from reality are at some point rationalized, we can watch at some distance, the natural cycle of a bubble from formation to bursting in a dozen or more on-going markets but some of them we are caught up in more directly.