DGrant Gibson

Robert Shiller, a Professor of Economics at Yale University and Chief Economist of MacroMarkets LLC, is a frequent writer on market bubbles. He is one of several writers sharing intelligent economic views which can be read here . He is often asked where the next speculative market bubble is likely to be. Housing? The stock market? He admits he does not know for certain but does have some hunches. Robert’s Shiller’s view is that bubbles are social epidemics, fostered by a sort of interpersonal contagion. He states that a bubble forms when the contagion rate goes up for ideas that support a bubble. But he further states that contagion rates depend on patterns of thinking, which are difficult to judge. Besides the obvious choices for a bubble, Robert sees a favorite dark horse candidate for such an event- land values. Our preconceived notion that the housing market and farmland always move together are inaccurate. Robert states that,from 1911-2010, in the US, the co-relation between annual real growth of prices of homes and farmland was only 5%. Real farm prices have only fallen 5% from their 2008 prices levels vs. the 37% decline in real home prices since their peak in 2006. Since food abundance/shortages are the flavor of new stories, attention is directed to it with emotion.

So, why am I putting attention to this? I wrote an article a while back right here about an interview with Charlie Munger, partner to Warren Buffet of Berkshire Hathaway. Charlie Munger’s view of the stock market is that most people do not use sound judgement with equanimity, they operate from fear and emotion. Hence the crazy gyrations in the stock market.

The word equanimity means to use sound judgment under pressure. One of my favorite one liners when chatting with people is ‘see you soon, and always remember, keep the bubble in the middle’. It is simply the carpenters rule. A building cannot be constructed if it is not build on a level foundation. Donald Trump wrote on this exact thing in his first book. He went to visit a site on which he was building a high rise and noticed, in his view, the foundation appeared to not be level. A further check confirmed his suspicions. The foundation was not level. A critical fact to correct early. I hired contractors build a log home for our family in the 1980’s. The dirt was backfilled by backhoe around the foundation following foundation construction. A second contractor came to aid with the construction and ‘eyed’ the foundation, claiming it did not look level. A further check confirmed his suspicions. A seismic check shed light that one corner was low by 9 inches. It was not a pretty scene. If the house was constructed on that foundation it would have caused nothing but problems for years. It then cost me a large sum of money to redo, money I needed to complete my house. The bubble was not in the middle. A lesson learned.

The bubble we need to pay attention to is based on intelligence, not emotion. I wanted my house build fast, as winter was coming soon. I allowed intelligence to rule over emotion which corrected the problem. It delayed a move in date, but was small compared to maintenance costs for years to come.

Have a great day, and, oh by the way, keep the bubble in the middle.

Until the next WebLog, GG