How to Profit from an Asset Bubble

In order to profit from an asset bubble, we have to first identify it. Only then can we take the necessary actions to profit from it. We must also understand that the market can act irrationally longer than we expect, so we mustn't resort to leverage that require us to cover our bets within a given time frame. We must place our bets for the long term.

To identify an asset bubble, we rely on historic data. When prices are close to historic highs, measured in gold, we know that the asset is in a bubble. We can also identify bubbles in real-estate by calculating the number of years it will take typical buyers to pay down their loans, given no debasement of the currency. When typical houses correspond to decades of savings, we know real-estate is in a bubble.

A useful metric for stocks is the price/earnings ratio, which indicates how long it will take for earnings to cover the cost of investing. This ratio should not exceed 15, because we cannot expect to be be gainfully employed for more than 45 years, and we don't want to be forced to sell our stocks during our retirement. At price/earning ratios above 15, we'll be unable to comfortably retire without selling our stocks, even after 45 years of saving.

The problem in the case of overvalued stocks is that there will be selling pressure when the typical retiree is forced to sell, either directly, or indirectly through pension fund liquidation. The problem with overpriced real estate, is that it reduces the pool of buyers so that prices have to come down in real  terms, measured against everyday consumer goods as well as gold. That's why such overvaluations are called bubbles. The day eventually arrives when there is a lot of selling pressure and hardly any buyers, and the price implodes. Asset bubbles are precarious delusions that we have to avoid.

Once we've identified a bubble, we need to get out of them it much as possible. We sell the overpriced assets, and we buy gold instead. The reason for our move into precious metal is that asset bubbles tend to spur monetary debasement. We don't want to be victims of central banks largesse. When central banks print currency in order to help debtors at the expense of creditors, we want to be out of reach.

Buying gold during times of asset bubbles locks in profits that cannot be eroded by central banks. When I realized that it would take the average person some three decades to pay down on a loan for my house in Norway, I sold it, and moved into gold. While the person who bought my house has benefitted from easy credit and a general debasement of the Norwegian currency, I've done far better. I still have about 30 years of savings locked away in gold. The house I sold is nominally more expensive, but the time required to save up for it has fallen by half when measured in gold.

The big loser in all of this is not the house buyer, but the dupe saving in Norwegian currency. I'm better off with my gold. The house buyer is also well off. The bag holders are the ones believing that Norwegian currency in a bank is a safe way to save.

With asset bubbles everywhere, it's time to secure profits. It's time to sell all that isn't of immediate use, buy gold, and hunker down for a decade or two. Only when the asset bubbles are fully deflated is there any reason for us to come back into the market. That time will come, and we can be sure that it will be reflected in historic data, measured against gold. That's when we reappear with our gold to buy assets on the cheap.

Gold eagle

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