Where To Invest When (Almost) Everything's In A Bubble

Tyler Durden's picture

Authored by Charles Hugh Smith via OfTwoMinds blog,

Many things that are scarce and thus valuable cannot be bought on the global marketplace.

Now that almost every asset class is in a bubble, the question of where to invest one's capital has become particularly vexing. The ashes of wealth consumed by the 2008-09 Global Financial Meltdown are still warm, at least to those who never recovered, and so buying assets at nosebleed valuations in the hopes of earning another 5% aren't very compelling to anyone pursuing common-sense risk management.

As it happens, I wrote a whole book on this vexing question, An Unconventional Guide to Investing in Troubled Times.

I can't summarize all the ideas presented in the book in one brief blog entry, but some basic principles will serve us well when bubbles abound.

1. Risk cannot be disappeared, it can only be masked or transferred to others. When anyone claims an investment is low-risk, they're actually claiming either A) the risk has been obscured by fancy footwork or false claims, or B) the risk has been transferred to some mark, chump or bagholder--nowadays, that usually means the taxpayer, as profits are private and losses are socialized.

2. Value flows to what's scarce. As economist Michael Spence and his colleagues have noted, conventional capital--the kind issued by central banks and private banks--is not scarce and therefore has little value. Ditto for conventional labor. This is why the returns on conventional capital and labor are so low.

Spence et al. suggest that what's scarce in today's global economy are ideas that create new business models, new productivity tools and new goods/services: Labor, Capital, and Ideas in the Power Law Economy.

This suggests an investment strategy of identifying what's scarce, or what will soon be scarce, before everyone else.

3. Many things that are scarce and thus valuable cannot be bought on the global marketplace. The number one example of this is of course health, which is priceless because even having millions won't buy your health back when it's been lost.

Yes, you can get patched up with stents or costly meds or maybe score a black-market organ harvested from some unfortunate prisoner somewhere, but all this sort of thing merely keeps you alive; it doesn't actually restore health.

So any investment in health will pay extremely high dividends. It doesn't take a ton of cash to invest in one's health; most of the investment is behavioral.

Other examples of what can't be bought in the same way stocks, bonds and housing can be purchased: meaningful work, communities with a collective memory of how to get things done in the real world, a functioning community economy, etc.

Investing in work you find fulfilling and meaningful pays dividends that can't be bought on the marketplace. Once again, investing in one's skills and social/intellectual capital doesn't require much cash; thanks to YouTube University and many other free or low-cost sources, anyone can start acquiring the eight essential skills I lay out in my book Get a Job, Build a Real Career and Defy a Bewildering Economy. The basic idea is to learn how to build your own career and job.

4. Comparing the relative value of various assets helps identify what's relatively overvalued and undervalued. The key word here is relative: to say something is absolutely undervalued is trickier than concluding something is undervalued compared to other asset classes.

For example, compare housing in the U.S. and global commodities. Based on the national Case-Shiller Index, house prices have reached new bubblicious levels. Thanks, Federal Reserve!

It's not much of a stretch to reckon that, hmm, valuations are looking a bit more likely to be overvalued here rather than undervalued.

Now ponder this chart of global commodity prices. It seems commodities are looking decidedly unbubblicious at these levels.

Many commentators have noted that commodities such as precious metals, agricultural products, fertilizers etc. are considerably lower than their recent peaks.

So one possible strategy here would be to sell that apartment complex you bought in Seattle that's doubled in value over the past few years and use the proceeds to start nibbling on some commodities that look beaten up, ignored, scorned or simply low in their historic range.

This doesn't mean commodities can't or won't go much lower, or the Seattle apartments can't or won't go much higher; remember, risk cannot be disappeared. It's an exercise in risk management, and making an assessment of what's more or less likely to happen over the next few years. It's an exercise in hedging gains by seeking exposure in assets that may become scarce and thus more valuable in the near future.

(This is not a recommendation to pursue this strategy; I mention it only as an example of the principle of comparing relative value.)

There's more in the book, have a look: here's the Intro and Chapter One, and the Amazon page: An Unconventional Guide to Investing in Troubled Times.

*  *  *

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com. Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

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goldoverbtc's picture

Invest in things you think will eventually become a bubble?

 

www.escapeamazon.com

 

loebster's picture

"The ashes of wealth consumed by the 2008-09 Global Financial Meltdown"

In 2008 the THIEVES at the FED stole $30 Trillion. Talk about wealth consumed. http://bit.ly/1KogtGi

YUNOSELL's picture

I don't buy physical gold & silver hoping it will go up in value -- I buy gold & silver to preserve the little wealth I have from the stealth financial looters

greenskeeper carl's picture

Same here. But, a large portion of money I would have invested in the stock market, if it wasn't a hopeless casino, goes towards paying off my house. Living rent free will make it much easier to retire on less money. I know all about the reasons real estate can be bad, and I'm under no illusions I'll be making a bunch of money when I eventually sell it, but it would be nice to live mortgage free.

Dame Ednas Possum's picture

Gold bitchez!!! 

(Someone had to say it) 

 

Cue Mozo the Clown from the church or crypto in 3... 2... 1...

 

fx's picture

The article is a complete joke. It's intellectually dishonest, because it starts with a -silly- assumption and then uses that assumption as if it were a hard fact to then argue a case. A classic.

 

"buying assets at nosebleed valuations in the hopes of earning another 5% aren't very compelling to anyone pursuing common-sense risk management...""

 

That 5 % is of course a totally made up number. Who says that the potential upside is that small? What if the potential reward is 20 or 50% or even 100% over the next 3-5 years? All of a sudden the entire argument collapses!

IH8OBAMA's picture

There's nothing wrong with bubbles.  Just ride 'em to the top then get out.

How do you tell when the top has arrived?  Ha ha ha.  Listen for the bell.  They always ring it at the top.

 

Dsyno's picture

"it would be nice to live mortgage free."

If only we could live Property Tax free.

roddy6667's picture

Try to move to an area with low property taxes when you retire. They can be a large part of your income. You won't need good schools, gymnasiums and athletic programs for children and all that when your kids are long gone. I checked out the Raleigh-Durham area just before I retired.   It tics a lot of the right boxes. Homes are cheap and property taxes for a 3BR 2BT home can be less than $1000 a year. Check it out on Realtor.com. You can see property tax and sales price history on Zillow.com. Just scroll down.  

I moved to an even cheaper area, but NC would be a good choice for people who are working, also. Look up the Research Triangle.

Delving Eye's picture

And you think living in an area with shitty schools and no services is a plus? What kind of kids (and parents) do you think your neighbors are going to be? Not the kind of neighbors I'd want. 

I've nearly paid off my mortgage here in Fairfield County, CT. Yes, my property taxes will take a bite, but I can claim them as a deduction and I appreciate the services I get in my nice little town -- especially the Animal Control Officer who has put a stop to any barking dog in my vicinity (4 different homeowners were paid a visit). And all I had to do was give him a call. 

Quality of life works for me.

roddy6667's picture

I just love the way you condemn the area, its schools, and its people without ever going there and studying it like I have. You stay in Fairfield and enjoy your taxes. People in other areas don't have to pay through the nose like you do. Also, use some tax spftware like TurboTax, and do your taxes two ways. Once with the taxes being deducted, and once again without the deduction. How much difference does it make? How much does the writeoff save you a month? Peanuts. And you get what for that?

Ron_Mexico's picture

I'm not sure where you got that information, but I would double check that. You're not going to be able to pull that off unless you can find the house you describe for around $125k in maybe a few areas, and you're probably not going to do that. Taxes in Wake County are lower than Durham or Orange counties, but real estate prices are high, so taxes are still high. If you want to keep it down to $1000 you're going to have to go to one of the peripheral counties (Chatham, Alamance, Franklin) that Yankees haven't infested yet.

CoCosAB's picture

Don't invest!

FUCK the system. And then...

HRClinton's picture

Invest in...

1. YOURSELF

2. YOUR FAMILY

3. YOUR BUSINESS

4. YOUR NETWORK

The rest will take care of itself, or it can go to hell.

abyssinian's picture

Ethereum, NEO, and other cryptocurrencies, Bitcoin.... becauuse jamie dimon, warren buffet said it's fraud and a bubble.  The two most scammy fuckers on this planet. 

YUNOSELL's picture

and Lloyd Blankfein of Goldman Sachs Vampire Squid infamy says it is legit

Orc from Mordor's picture

Bullshit. Invest in ammunition that'll help you get food and get rid of those who want to fuck you when SHTF.  And invest in condoms that'll help you protect yourselves after you have used up your ammunition. 

Orc from Mordor's picture

PS

After a condom has been used, you might inflate it into a bubble since you so much like bubbles.

Dame Ednas Possum's picture

You can reuse them by just turning them inside out and shaking the fuck out of it. 

 

 

cat2005's picture

Shaking the “fuck” out of it . . . now that is vivid imagery

GlassHouse101's picture

PM, CHF, .22LR, 9MM

adamas's picture

.22 LR will only wound them ... .243/.270 are much more certain 

GlassHouse101's picture

ehh, they're much cheaper, AND little known fact: .22 is the most common fatal wound caliber.

Ron_Mexico's picture

I thought it was .38 special . . . damn I must be livin' in the past

Pi Bolar's picture

There's plenty stocks on 12 month lows. The Fed will pick them up soon. Everything goes up,up,up. Fed's got your back.

GlassHouse101's picture

They could, but they would destroy the currency in the process, soooo either way you're up ____ creek.

buzzsaw99's picture

i will second the sentiment about investing in one's own health.  the cost is so low to adopt a healthy lifestyle and the return so high that only a fool would ignore this advice.  not only that but being sick in an owebomberscare world is insanely expensive while at the same time shoddy and disgusting.  if you are healthy and poor you are way ahead of a sick miserable billionaire.

813kml's picture

Someone's asking to be organ harvested.

BrokeMiner's picture

let me offer a nice asset class that is in NO WAY near a bubble: gold/silver miners - come and get some bitchez

FreeShitter's picture

yeah miners are great....lol paper gld and slv are manipulated to FUCK.

shizzledizzle's picture

I agree... I approach with caution because you know the poor bastards are struggling to keep their heads above water. However any that can keep their books in the midst of this shit are going to be proven winners when this shit show stops. I did buy some AUY calls a while back.  

c2nnib2l's picture

invest in shitcoin and relax baby ! can't wait to see this exploding... I never make fun of other people especially when they lose mobey bit bitcoin mafia ! ohhhh simple cannot wait !

Dsyno's picture

"shitcoin... can't wait to see this exploding... ohhhh simple cannot wait !"

Someone is clearly pissed off that they missed the boat.

I am a Man I am Forty's picture

FAANG and Cryptos.  Easy peasy.

s2man's picture

LMAO.   Thanks.

 

... But you can change.

I am a Man I am Forty's picture

If you would have done this 5 years ago you would be rich as fuck.  I of course did not except for Apple, made a ton of money on Apple.

roddy6667's picture

"f you would have done this 5 years ago you would be rich as fuck."

The same thing was true about Enron just before it wasn't.

Fundies's picture

Invest in boats.....you missed the boat.

I am a Man I am Forty's picture

So I had some Ethereum hit my Coinbase exchange account and I was trying convert the ethereum to Dash through Shapeshift (converts cryptos) and deposit it to my Trezor wallet and it didn't show up in my account even thow Shapeshift showed confirmation on the blockchain. It showed up a few minutes later after I refreshed my trezor wallet.

lmao....what have I gotten myself into.  Just want to be in the game a little bit guys, no big deal.

 

roddy6667's picture

Immediately after I read your post, an image flashed into my mind. It was a vivid image of a mime juggling invisible objects, only to apparently see them all fall to the ground and break, still invisible.

Just my view of Bitcoin.   

Silver Savior's picture

I myself and tired of fiddling around with this shit. 

JamesBond's picture

Cash into a lowering interest rate environment and hard assets, including real estate, into a rising interest rate environment. Right about now would be a good time to make that switch.

DEMIZEN's picture

when all that cash spills on mainstreet, there wont be any bubbles left. invest in invisible to investors.

Silver Savior's picture

Physical silver and gold. Duh! Der da derrrrr.