Henri Eliot: Are we in a bubble?
Rob Campbell: My first response is that of Tonto when told by The Lone Ranger that “we” were surrounded by hostile Indian forces: “What do you mean, ‘we’, white man?”
When I look at the activities I am directly involved as an investor or director, I can see nothing which feels like a bubble in the speculative sense.
How do you define a bubble?
The prices of assets always vary in any market. They seldom vary for any length of time in a single direction or in speed or with consistency between assets. This is the essence of a market. Even very substantial variability is not evidence of anything in itself other than a very substantial shift in the demand for or supply of an asset. Markets experience this, they cope and adjust.
The “bubble” terminology seems to be reserved for that category of these unusual events which arises from the demand side of the market, when an asset faces a significantly inelastic supply curve, and then only when the change in demand is seen as somehow artificial. An economist will rightly struggle with the idea of artificiality in this respect. Even in those frenzies of bidding up asset prices which make the history books there are many who benefit from both sides of the trades all the way to the bust – a process which Buffet immortalised by the observation that in bubbles as in sex the best bit is often just before the end. The losers, up till that point, are simply those who have chosen to or not been able to participate. In many cases, such as railway or fibre optics building, wider society has also been a winner from the asset rush.
What about the local markets? Is there a speculative bubble in bonds as evidenced by low interest rates and therefore high bond prices?
No, there is simply massive pump priming by the authorities globally. In addition inflation is so low that real interest rates are not as low as they feel to those used to higher numbers.
Image: Rob Campbell
Is there a speculative bubble in equity prices?
No, market multiples are not excessive by historic standards, dividend yield is competitive with bond yield. Equities are well bid because relative to other assets they still offer fair value consistent with a reasonable equity risk premium.
Is there a speculative bubble in house prices?
No, in the markets where price rises are most prominent there is inelastic supply in the short term and a clear upwards movement in demand from migration and low interest rates. This too shall pass.
Put simply, some assets are not cheap. But when it is not hard to see why they are not cheap it makes no sense to call these prices a bubble.
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Henri Eliot is CEO of Board Dynamics
