Sunday Musings: Bubble Trouble

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Much has been written about former Fed Chairman’s new book “The Age of Turbulence.” While I have not read it, Elliott Wave International had a few excerpts and quotes about it.

Apparently, Mr. Greenspan feels that the current housing bubble was something that could not have been forecasted specifically. This article then goes on to quote the various prior public media announcements that the Elliott Wave Forecast has made alerting to the potential real estate blow up.

It’s interesting to note that various writers and publications now are trying to take credit as to who made the first call in predicting the crisis. Again, the problem is in “predicting.” No one has the ability to look into the future; it is nothing but a wild guess. And yes, the handwriting was on the wall that real estate assets can’t simply go on inflating forever.

This graph shows the rising real estate housing prices over the past 20 years. The trend was clearly up and then reversed at the top. If you had the weekly data available, you could easily plot a long term moving average and see the point when it broke below the trend line; in the same fashion as we do with mutual funds and ETFs. However, the break to the downside, indicating a bear market, obviously occurred after the top had been formed.

While this would have indicated a trend reversal, it would not been of any value, since real estate is an illiquid asset, and this type of timing to sell would have been way late.

My view is that once a trend has been set in motion, as in the case of real estate, there is not much the Fed could have done to stop it short of draconic measures. One such measure would have been raising interest rates sharply which would have ended the real estate boom in a hurry.

However, the fallout effect on the economy as a whole would have been far reaching and extremely negative. This makes me believe that once any asset bubble has been formed there is no choice but to let it pop and live with the consequences.

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