Dear friends….wow…it has been a long time.  A lot of changes….a lot of new things.  But one thing has not changed for me….I am still involved in commercial real estate….and it is going well for the most part.  The property management company (Jaxon Texas Property Management) and the investments in El Paso, TX are doing well.  The brokerage business in New Mexico is picking up (Grubb & Ellis | NM) and it has been an interesting ride for me.

I know it has been a while but I truly want to get back into the swing of things and keep this blog going.  Once recognized as one of the top ten commercial real estate investing blogs in the country….now….just another blog…maybe worse.  I hope to fix that in the next coming months.  So….I would like to kick things off …..again….

I would like to introduce you to my buddy and colleague, Brandon Saylor….he’s a writer and a good one at that…..check out his latest below.  Brandon is sometimes controversial but….I agree with most of what he says…if not all.  With Brandon’s permission….I will be posting Brandon’s writings on this blog.

Brandon Saylor

Anatomy of an Economic Bubble

This recession has taught me a lifetime worth of knowledge. Observing the catastrophic meltdown that occurred in 2008 seared lessons within me. One of these fundamental lessons is the understanding of economic cycles and the red flags of danger. In short, the economic meltdown of 2008 began with the bubble bursting of credit markets affecting everything from real estate to the stock market. It is paramount to understand the anatomy of a bubble and the natural economic cycles that ebb and flow through time. Below are the main stages of a bubble.

There are no time limits between each stage. The “stealth phase” is the 1st phase in which the asset is adhering to its core fundamentals. Subsequently, the “awareness phase” is when the value of the asset begins to rise above its fundamental value. In the third phase, the asset value explodes as the media begins to remark about its escalating value. A swelling number of investors eulogize the merits of the asset as they merge with the cause.

In the final phase, the value of the asset begins to dissipate. Many naive investors still believe it will continue to increase in value. The daunting reality sets in that the asset is overpriced and everyone tries to get out. Unfortunately, many are left behind as the value of the asset plummets to its long term fundamental value.

Conceivably, the most legendary and oldest, well-documented instance of a speculative bubble is the “tulipmania” that hit 17th century Holland like a bomb. The tulip became an instant hit upon its introduction to Western Europe in the mid 16th century. Dutch collectors developed a hierarchy of tulip varieties based upon their species and coloring. Because it was impossible to determine which variation would bloom from a particular bulb, the tulip grew into an asset of speculation. Before the 1630s, the bulbs were popular among the extreme wealthy and were flaunted to exhibit class. By the mid 1630s, the obsession caught on with the middle class and lower socioeconomic classes. The increased demand caused the price of the bulbs toescalate dramatically.

The market reached its pinnacle in late 1636 and early 1637, after the bulbs had been seeded to blossom the following spring. People mortgaged their homes and traded in their savings in order to buy rare and exotic bulbs to resale at higher prices.

In February 1637, as winter turned to spring the bulbs were close to flowering, consumer confidence evaporated and the market suddenly crashed. As the price collapsed, nobody would buy the bulbs, even though they offered them at one quarter of the sums they had paid for them. The tulip bubble burst is alluded to in the recent sequel of Wall Street 2.

Economic bubbles are a reality of any capitalistic monetary system. The point of this email is to recognize the red flags before it is too late. The first red flag is to recognize the larger macroeconomic forces that dictate the market. It is now understood the catalyst for any bubble begins with easy money. The Austrian School of Economics believes “asset bubbles occur when there is an extended period of low interest rates coupled with an expansion of credit. The availability of cheap money encourages speculation in one or more asset classes causing the price to escalate rapidly exceeding their underlying fundamental value.” The availability of cheap money promotes an over abundance of growth. Consequently, a bubble ensues. Bubbles can be an excellent way to make money if you get in at some stage in the “awareness phase” and get out before you reach the inevitable landslide. The key to success is to not be trapped when the eruption begins.

What is the next bubble? In the past decade, we have had the escalation and crash of the dotcoms, the oil bubble and the monstrous credit bubble following the oil crash. Is the stock market the next big bubble? The Dow Jones industrial average is now trading at 86% of its all time high of 14,164.53. Is it gold? Gold is constantly breaking record prices for the value of a troy ounce of gold. Could it be the bond market? Another energy bubble? At this point, it is hard to determine which market/asset is going to be the next bubble. However, armed with the knowledge of warning signs it will be easier to decipher the craze when an asset is going gangbusters.

Ultimately, there are two things about economic bubbles I want to leave with you today. Greed intensifies the problem and it is the definitive drive to astronomical prices. As they say, “Avarice has ruined more souls than extravagance.” And ask yourself does this type of speculative behavior make sense?  Does gold trading at $1,455/oz make sense? Is the stock market value reflective of the health of the economy? Does $107/ barrel of oil make sense? If common sense does not fit the reality of the time then maybe it is a good time to get out before it is too late.

Have a great weekend my friends!

-Brandon Saylor

Good stuff huh?

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Until next time….rob