Bubblemania: Is It Time to be Skeptical of the Skeptics?

The worse the economy gets, the more Peter Schiff gets to be on televison–or at least that is how it was until recently. Mr. Schiff, CEO of Euro Pacific Capital, was one of the notorious market pessimists (or, in his opinion, realists) who forecast the collapse of the housing bubble before it happened. From 2004 to 2006, when the housing boom was going strong, he was only very rarely asked to offer his apocalyptic views on the economy in a television appearance. In 2007, as the real estate market faltered and the housing market aligned with his predictions, the networks came looking for him. By fall 2008, at the height of the crisis, Mr. Schiff’s director of marketing estimates that he was making media appearances nearly every day, sometimes twice a day, on outlets such as Bloomberg, CNBC, Fox News and NPR.

So what does it mean that after a year of relative inactivity that lasted through his run for Senate in 2010, Mr. Schiff is getting asked again to go on television with the same frequency as early 2008? It might be that as consensus gathers that the housing bubble was preventable and the Dow Jones Industrial Average hits its highest point since June 2008, there’s an increasing anxiety about inflated asset values. With investors still afraid of being seduced by illusory gains, the doomsday predictors have once again been summoned to cry bubble. And they are doing a lot of it.

“I think now there’s maybe too much of an audience about bubbles,” said Marc Faber, a fund manager and notorious market pessimist whose Web site, GloomDoomBoom.com, is illustrated with a series of macabre 17th-century paintings by Kaspar Meglinger called The Dance of Death. “Everybody thinks there’s a bubble everywhere,” he said. “Everything is high in terms of price, but I’m not sure everything is in a bubble.”

Economists say that it’s unlikely that “bubble” is the best term for what is going on with the market today. For there to be a real bubble, says Bill Fleckenstein, another market pessimist and manager of a Seattle-based hedge fund, “the behavior of the participants has to impact the economy.” He cited signs from previous bubbles such as people quitting their businesses to form dot-coms or taking money out of their home equity.

For Robert J. Shiller, a professor of economics at Yale and the author of the book Irrational Exuberance, the symptoms of a bubble are best measured not by studying the market but by contemplating the very particular sort of envy and greed that a bubble produces in investors. In times of bubbles, he said, investors “don’t really feel confident but they think, ‘Hey, it’s been going up and all these other people have been cashing in on it,'” he said. They begin to say, “‘I’ve been a fool and I feel kind of envious of people who did it.'”

Despite the absence of such signs, bubble-calling is rampant. Bullish investors can point out that unemployment claims have gone down, companies have cash on their balance sheets and corporate earnings beat expectations, but if we believe the headlines, grannies are hoarding gold bars, the housing market in China is about to go bust, the stock market is overvalued and tech companies are going public like it’s 1999. James Paulsen, an investment strategist at Wells Capital Management who says the economy is on a clear path to recovery, laments “an illness suffered by most investment players since the crisis, called Armageddon hypochondria.” He said to have a bubble, “I think you’re going to need some excesses, and the only way you’re going to get there is to reestablish some confidence.”

But as Robert Pavlik, a relatively upbeat market strategist at Banyan Partners, put it, “the optimists are the ones that sort of get dumped on.” On both sides, this reversal of fortune is still an unfamiliar feeling. “The folks yelling ‘bubble’ aren’t being dismissed as curmudgeons and idiots the way they are at most bubble peaks,” said Henry Blodget, publisher of Business Insider and infamous for his association with the dot-com bubble. Recent headlines by the bloggers of BI have included “13 Glaring Signs That the Market is Forming Another Huge Bubble,” “11 Signs That Gold Is In A Bubble That is Going to Burst” and “The Next Housing-style Crisis Will Be The Municipal Debt Bubble.” Mr. Blodget predicted that when we are really back in the middle of a bubble, such prognosticators will again be deemed “laughingstocks.”

Mr. Shiller recalled the annoyed reactions he elicited on a radio call-in show a few years ago by hinting that home prices might not rise forever. He said that it’s difficult to summarize the difference between then and now, but that it does seem his days of being dismissed as an “effete academic snob” are over. “I had the sense back then that the general public was not very interested or convinced,” he said. With what he estimates as one-third of the Americans believing in the strength of their real estate investments at the height of the housing boom, “at that point it was almost rude to them.”

Another notorious predictor of doom, Gary Shilling, said that having had multiple bubbles burst in recent memory “has made people more sensitive to bubbles and has encouraged them to look for more bubbles.” Mr. Shilling is an economic consultant who recently published a book called The Age of Deleveraging that predicts slow economic growth over the next decade. And while he acknowledges that there are “a few of us that have made a career out of spotting bubbles and forecasting their demise,” these days “it’s probably being overdone.”

But perhaps it’s because the financial crisis made brand names of bubble spotters–with the likes of Nouriel Roubini and Greg Lippman becoming coveted financial advisers–that the practice has become so prolific, and the predictions of the original bubble spotters continue to affect markets. “You got such fame if you called the housing bubble that people figure if you call enough bubbles and you get one right you are a hero,” said Jim Cramer, host of CNBC’s Mad Money. “If you get it wrong, you just say it hasn’t burst yet!”

When hedge fund manager Steve Eisman announced that the for-profit education industry was as “morally bankrupt” as the subprime mortgage industry–essentially saying that the student debt of the average University of Phoenix graduate was as likely to be repaid as the mortgage of the proverbial strawberry picker from California–shares in for-profit education companies tanked. But using one’s past successful predictions to justify predicting the next apocalypse is not always a good thing, as the recent criticism directed toward Meredith Whitney, for her dire predictions about municipal bonds, has shown.

Journalists have their own version of the bubble syndrome, clamoring over one another to be the person who successfully profiles the caller of the next bubble. Take the recent article from Bloomberg that has been bouncing around the financial media echo chamber for more than a week now. The headline: “Loneliest Man in Davos Foresees 2015 Bank Crisis While Global Elites Party.”

The lonely man in question was Barrie Wilkinson, a partner at the consulting firm Oliver Wyman, who was rather surprised when his report “The Financial Crisis of 2015: An Avoidable History” became one of the firm’s most read publications. The report has a cinematic opening about a hypothetical “John Banks” being awoken in Singapore at 3 a.m. in 2015 to learn that his employer has declared bankruptcy. “As he lay there in his spacious air-conditioned bedroom, unable to return to sleep, John tried to reconstruct the events of the last four years,” it reads, before launching into the hypothetical rise and fall of a shadow banking system in emerging economies due to increased regulation.

“What the media has certainly lost is that they try to make it look like a prediction rather than a scenario, and we would like to reposition it as a scenario–but a plausible scenario,” said Mr. Wilkinson.




Bubblemania: Is It Time to be Skeptical of the Skeptics?