One of the unfortunate tenants of the human condition seems to be an unrelenting propensity for repeating the same mistakes over and over again. The reason this persists is because of the constant arrogance of people in positions of power who manage to convince themselves that “This time is different” when they try to ignore market signals that show a problem and convince themselves that everything is okay. good.
The most recent example of this arrogance was the madness that home prices could continue to rise indefinitely, without interruption. The most disturbing part of the housing and financial bubble was that so many people were complicit in the self-delusion that any rational perspective was quickly dismissed. Consider the fact that banks were financing loans with low or no down payments in the belief that values would continue to rise. Investors were buying houses to ‘flip’ at ever higher prices, hoping that the values would continue their upward trajectory. People who didn’t have anywhere near the financial qualifications to buy a home were buying more homes than they could afford, based on the assumption that they could sell them for a profit if they couldn’t make the payments. .
Behind this bandwagon of self-deception was an army of real estate agents, mortgage brokers, and construction contractors generating huge amounts of income from the fictitious bubble. In a strange twist on human arrogance, we can convince ourselves that anything is rational if it’s lining our pockets. No one stops to ask if a housing bubble is really a bubble if prices keep going up. No one stops to ask whether a stock market coming out of a 25-year bull market can continue to rise at its previous rates of return. No one stops to ask how the government can fund even more entitlement initiatives when the present value of unfunded entitlements already exceeds gross domestic product by a factor of seven. (www.usdebtclock.org)
In a perpetual expansion of self-deception and madness, humanity continues to argue that “This time is different.” This time it is not a bubble. The government is printing money to finance the deficits, but it is not going to cause inflation. If I invest in this mutual fund, they can outperform the S&P 500 with no risk. My house is really an investment, so I should buy the biggest one I can for it to appreciate. Each of these sentiments have been echoed by many people over the past few decades, and they will be repeated once the current financial crisis stabilizes.
Pause for a moment to consider how many people have accepted the current “recovery” without hesitation or question. How many people have noticed that the private sector is still contracting and that growth only comes from the government spending borrowed money? How many people have noticed that home prices only stabilized because the Federal Reserve flooded the financial system with money, creating the risk of massive inflation? How many people have wondered if the current practice of spending borrowed money on projects that do not create real output will eventually lead to inflation?
It has always been and always will be true that people remain willfully blind to things they don’t want to see. Because of this, the bubbles will continue to expand, collapse, reform, and repeat themselves in perpetuity. As an individual, there is nothing you can do to stop these bubbles, but you can do a lot to benefit from them. By recognizing irrational market behavior, astute investors can position themselves to buy the extreme lows that follow every market crash. Investors are currently buying at post-crash prices and will get rich when the next bubble forms, so they are positioned for more deals after the next inevitable crash. The fundamental question to ask yourself is whether the next bubble will propel you rich or poor.