Saturday, August 04, 2012

You Can't See An Asset Bubble From The Inside

I can attribute some of my portfolio's success to the avoidance of asset bubbles.  If I had been invested in any of the crazes that hit the markets since the mid-'90s I'd be in a world of hurt.  Fortunately I don't follow crowds.  

I stayed in cash and fixed income while plenty of very smart people chased dot-com dreams in the late 1990s.  I remained in cash after that stuff peaked in March 2000 and wiped out plenty of people who thought they knew better than me.  I had a bad feeling about the Federal Reserve's stimulative monetary policy of the early 2000s and didn't want to pick the next bad thing by accident.  

In 2002 I attended a hiring conference in the San Francisco area (one of the Burlingame airport hotels to be precise) put on by one of the recruiting firms that love to place former military officers with large companies.  I sometimes wonder whether these recruiters collect the first-year bonus their candidates would otherwise get if they were hired on their own, but that's not germane to this article.  The clearest memories I have of that hiring conference were the pitches the recruiters gave for homebuilders, specifically Pulte and Centex.  The home mortgage bubble was in full swing and developers were busy paving over pristine farmland in Stockton, Pleasanton, and elsewhere to accommodate the Greenspan Fed's loose money policy.  The housing bubble sure looked great to the people inside homebuilders who thought they had it made.  I decided to pass on the homebuilding jobs available; they just weren't suited for my white-collar ambitions.

In 2005 and 2006 I was a trainee broker at UBS Wealth Management in The City, an outsider among the anointed children of our hereditary ruling class.  Some of top-producing brokers swore by real estate mutual funds tracking the Cohen & Steers Realty Majors Portfolio Index, thinking they were geniuses.  I went the other direction and bought a structured note (in my own portfolio) that bet on a decline in the homebuilding sector.  I was later fired from that brokerage job for having produced zero revenue, but I liquidated that structured note at a hefty gain when I was forced to transfer my account to another firm.  

My most loyal readers, all three of them, may be aware that I believe defense spending to be an unsustainable bubble.  I have tried in vain to convince my military friends not to pin their hopes on a second career with defense contractors.  The Pentagon itself is probably in denial about the bubble it helped inflate, with very little visible contingency planning underway for a radically austere future.  

Some things never change.  A lot of defense sector bulls are going to be let down.  That suits me just fine.  I'll be ready to buy the defense stocks they'll be forced to abandon.  

Full disclosure:  No positions in any companies mentioned.