It Is Different This Time... Not!

By: Robert Thomson

Each time the general public creates an asset bubble, they believe the rally in prices is justifiable by fundamentals. When proven methods of valuation demonstrate otherwise, people invent new ones with the caveat, "it is different this time." It never is.

In every asset bubble people will claim the prices are supported by fundamentals even at the peak of the mania. Stock analysts were issuing buy recommendations on tech stocks in March of 2000 when valuations were so extreme that the semiconductor index fell 85% over the next 3 years, and many tech companies saw their stock drop to zero as they went out of business.

Analysts even invented new valuation techniques to justify market prices. One of the most absurd was the "burn rate" valuation method applied to internet stocks. Rather than value a company based on its income, analysts were valuing the company based on how fast it was spending their investor's money.

When losing is winning, something is profoundly wrong with the arguments of fundamental support.

The Great Housing Bubble had proponents of the financial innovation model. Rather than viewing the unstable loan programs of the bubbles with suspicion, most bubble participants eagerly embraced the new financing methods as a long-overdue advance in the lending industry.

Of course, it is easy to ignore potential problems when everyone involved is making large amounts of money and the government regulators are encouraging the activity. Alan Greenspan, FED chairman during the bubble, endorsed the use of adjustable rate mortgages in certain circumstances, and official public policy under the last several presidential administrations was the expansion of home ownership.

When everyone involved was saying things were different and when the activity was profitable to everyone involved, it is not surprising events got completely out of control.

There is an understandable desire to believe a huge price rally is "different." Everyone wants to believe they windfall they received will keep coming. People who have been rewarded by the rally will be the last to see the signs of its impending collapse. They will maintain denial past the point of breakeven. It is not until they actually lose money that they realize it was not "different" this time. Of course, by then it is too late.

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Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall? Learn more and get FREE eBooks at: Read the author's daily dispatches at The Irvine Housing Blog: Visit It Is Different This Time... Not!.

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