This Bubble Has Reached Ludicrous Speed


Sometimes you must resort to fiction to explain reality. Today is one of those times. We have run out of words to describe the relentless march higher of global asset prices. Bubble seems so quaint, so terrestrial. How do you describe something so out-of-this-world?

Then we remembered a pretty forgettable Mel Brooks movie called Spaceballs. The good guys had spaceships that looked like camper vans. The bad guys drove huge, atomic energy guzzlers (global warming having, by this time, probably rendered earth a fiery, uninhabitable hell hole, like Phoenix in the summer). There were four speeds on the inter-stellar energy hogs: sub-light speed, light speed, ridiculous speed, and finally, ludicrous speed.

Somewhere along the way to 6,000, the ASX/200 is going to reach ludicrous speed. We may be there already, in fact. It’s like reaching escape velocity from reality, where we slip the surly bonds of earth to touch the face of infinite wealth… before… before what?

How long do you think it takes to fall from twenty-one miles up? That’s how high Chuck Yeager was on December tenth, 1963 when his Lockheed NF-104 experimental rocket ship began to spin out of control. The NF-104 really is a rocket ship, with a liquid rocket fuel engine, designed to take the plane and its pilot to about 120,000 feet, which, for land-lubbers like us, is effectively space.

When you’re that high up, it’s a long way down. If a falling object falls at a rate of thirty-two feet per second, per second… and there’s 5,280 feet in a mile… and you’re twenty miles up… well… our physics fails us… but it seems like you’d have enough time to at least smoke a cigarette before you hit the ground, perhaps have a cup of coffee, read a Russian novel, or wonder why you ever paid so much for that stock at the top of market which everyone admitted made absolutely no sense.

The signs of the public’s collective departure from sanity are all around us. Two surfers in wet suits are on the cover of today’s Australian Financial Review. We don’t know the guys at all. We’re sure they’re smart, if, er, a little wet behind the ears. They are said to be riding a “new wave” of interest in the Internet.

A word of caution about the riptide of financial markets: it may be a new wave, but it crashes just like all the ones before it. And in that sense, waves and financial markets are more alike than we first imagined. Both are cyclical. Both inevitably crash. The goal, of course, is to catch them early and ride them safely into shore (or so we imagine, since we’ve never actually surfed.)

But all around us things are getting more ludicrous by the day. ‘Alternative’ U.S. investment firm Fortress recently discovered nearly $6 billion in private equity assets under management that it “did not previously account for,” according to wire service reports. You’ve probably been lucky enough to find a twenty dollar bill on the ground once in your life, or some loose change in the cushions of your couch. But four billion dollars is a lot of loose change. Fortress must have a really huge couch, or a very large number of smaller couches.

Fortress is getting ready to go public. In these ludicrous times, there are undoubtedly pension funds, hedge funds, or investment banks that can’t wait to buy a piece of Fortress’ asset management business. But what kind of multiple will it command on asset of nearly US$30 billion.

Can you really put a price tag on the genius of a firm’s asset allocators? How do you value a capitalist? What is an appropriate multiple for an acknowledged master of the universe? Is it five times IQ, eight times ego, or ten times vanity?

Now we think we understand why our one-main brain-trust in the London Daily Reckoning office, Bill Bonner, issued his ‘crash alert‘ a few weeks ago. When you’re so high up you’ve lost all points of reference, all perspective on how to navigate correctly, and most importantly, the actual ability to maneuver, you’re going to crash.

About the only real room to maneuver, from an investment perspective, is to get some assets that leave you well and truly grounded. We prefer hard assets, of course, or equity stakes in hard asset companies. And for a truly grounded asset, there is none better than the yellow metal.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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9 years 8 months ago

[…] Two surfers in wet suits are on the cover of today s Australian Financial Review. We don t know the guys at all. We re sure they re smart, if, er, a little wet behind the ears. They are said to be riding a new wave of interest in the … – more – […]

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