April 16, 2019
I’ve lived through two asset bubbles during my career–the technology and housing bubbles. For what it’s worth, I believe we’re currently marching through another asset bubble that has yet to pop. If I’m right, this will be my third bubble in 20 years.
I find asset bubbles fascinating. As they inflate, I enjoy monitoring and documenting their existence in real time. For example, on March 3, 2000, I was so amazed by the power and tenacity of the technology bubble, I printed a description page of every stock in the Nasdaq 100 that included the stock’s price and price-to-earnings ratio (P/E). I couldn’t believe what was happening and wanted to capture the madness of crowds on paper. Looking through these pages today, I’m able to relive the mania and remember how insane things became.
Below are a few of the description pages I printed shortly before the technology bubble popped. It truly was an amazing period. If you’re interested, I have 96 more examples!
Of course, after the technology bubble popped, we had the housing bubble. During the height of the housing bubble in 2005 and 2006, one of my favorite hobbies was to ride my bike around Jacksonville Beach and take pictures of condominiums under construction. They were going up everywhere. Taking pictures of condos was my way of documenting the cycle and obtaining proof that there were signs of a bubble literally going up all around us.
Below are two of the condos built during that period. The condo on the right was one of the largest and last condos to go up before the bubble popped.
While there are many similarities between the current cycle and the technology and housing bubbles, there are also important differences. In my opinion, the current cycle’s asset inflation has been broader, spreading throughout many asset classes. It appears that everything from junk bonds, commercial real estate, art, equities, sovereign debt, private equity, to 1969 corvettes, has gone up in price. Given the broadness of this cycle’s boom, if you own assets, it’s been hard to miss out on the gains.
While most asset prices have increased this cycle, wages have struggled to keep up with inflation. According to the St. Louis Fed, median weekly real earnings increased from $340 in Q4 2008 to $355 in Q4 2018, or 0.4% annually. Meanwhile, during this ten-year period, the S&P 500 has increased 187%, or 11% annually on an inflation-adjusted basis.
Both real return data sets are shown below, with the S&P 500 starting value scaled to the starting level of median real earnings. The disparity in growth of asset prices versus wages is one of the reasons, in my opinion, wealth inequality is becoming an increasingly noticeable and popular topic.
I’m reminded of this cycle’s increasing wealth disparity each morning as I drive to work. To avoid the growing number of traffic jams on Highway A1A, I cut through Ponte Vedra Boulevard to reach our office in Jacksonville Beach.
Over the past several years, Ponte Vedra Boulevard has been undergoing a major transformation. Unlike 2005 and 2006 when the beaches were littered with new condos, the current trend is to tear down very nice homes and replace them with even more extravagant ones. A friend of mine calls it an ego measuring contest for the extremely wealthy!
Similar to the last two cycles, I’m monitoring and documenting this cycle’s bubble-like trends and behaviors. Specifically, I’ve been taking pictures of many of the teardowns and new builds on Ponte Vedra Boulevard, or as I refer to it, Asset Inflation Boulevard.
Below is a compare and contrast photo to help illustrate what I mean by nice homes being replaced by extravagant ones. It’s difficult to explain the size and length of this home under construction. To get a better understanding, I included an average sized beach house in the picture (to the right). I’ve labeled these monster residences “Quantitative Easing Beach Homes,” as many were built after the Federal Reserve implemented its asset purchase programs and expanded its balance sheet. While I need to do further research, I suspect the average size of a new beach house has grown commensurately with the Federal Reserve’s balance sheet 😉.
Below is a picture of another QE house after completion. They really are beautiful homes. Well done Bernanke and Yellen! Sorry Powell, I’d give you credit, but construction started before you became Chairman!
The benefits of the teardown boom go above and beyond the obvious. For instance, one of the nice and convenient things that comes with an entire zip code being torn down and reconstructed is the number of porta-potties sprinkled throughout the neighborhood. Going for a long run or walking the dog and need to use the restroom? No problem! You can pick from dozens of neighborhood-friendly options, with some even including freshly scented hand sanitizer.
Another advantage of the current cycle’s teardown construction boom is the number of dumpsters placed along the sidewalks. There’s nothing worse than picking up after your dog and not being able to find a trash can. Accompanying the current boom in teardowns has come a huge increase in supply of neighborhood dumpsters. There’s literally a giant trashcan at every other address!
As the current cycle has matured, I’ve also noticed an increase in teardown competition and possible house envy. To illustrate, I recently took pictures of three homes. The first picture is of a house that was once one of the nicest non-beachfront homes on the street.
Not to be outdone, someone bought the home next to it, tore it down, and built a similar but much larger home. On sunny days the new larger home casts a shadow on its neighbor!
While the new home is very nice, it will soon lose some of its street stature, as the house to the left of the new home was recently purchased and torn down. It’s being replaced with what appears to be an even larger house (below). On Asset Inflation Boulevard, it’s not easy staying on top!
All three homes together…
And finally, the beachfront house below took two lots, or teardowns, and required considerable time to build. I know this house well, as its construction resulted in backed-up traffic on multiple occasions and once caused me to be late to pick up my kids from school. The house is so big my son asked me if it was the new library!
While watching the transformation of Asset Inflation Boulevard can be entertaining, the topic of wealth inequality is real and gathering momentum. To be clear, I have nothing wrong with the decision and right for someone to tear down a nice home and build an even nicer one. In fact, I’m a strong advocate of capitalism and free markets, along with the rewards such an efficient system can bring. However, in my opinion, many of this cycle’s rewards were not a result of capitalism and free markets, but were predetermined by central banks and their desire to use asset prices to lift the economy out of the last cycle’s downturn. Therefore, while I expect many people will blame capitalism and free markets as the reason for this cycle’s rising inequality, I believe the main driver is monetary policy and another prolonged period of ultra-easy money.
As with the last two cycles, I expect there to be many questions and difficult decisions after the current market and economic boom turns to bust. Although the timing remains uncertain, I feel I have a front row seat as I drive down Asset Inflation Boulevard. I’ll keep watching and documenting the teardown indicator closely. I suspect once the porta-potties, dumpsters, and construction trucks begin to leave, the current cycle will be approaching its end as well.
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Definitions:
Nasdaq 100: The Nasdaq 100 is a capitalization-weighted stock market index comprised of equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ exchange.
S&P 500: The Standard & Poor's 500 Index is an American stock market index based on the market capitalizations of 500 large companies.
P/E: A Price-to-Earnings ratio is calculated as a stock’s price divided by its earnings per share.
Beta: Beta is a measure of the volatility, or systematic risk, of an individual stock in comparison to the unsystematic risk of the entire market.