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Commentary

Officially sanctioned bubble culture

5 May 2015 by Jim Fickett.

The Joint Committee of European Supervisory Authorities recently acknowledged that extraordinarily low interest rates, now policy in the EU as well as the US, are likely to channel money away from truly productive investment and into unproductive and dangerous asset price bubbles:

As market expectations indicate that future real yields are likely to stay below GDP growth, they … suggest that bubbles are in future more likely than in recent past. Available historical data confirm indeed that asset prices, in particular also for real estate (relative to rents), tend to be elevated when the interest rate is low (relative to output growth)… Given the low relative performance of growth rates, savers turn to bubbles to reach their return targets. Over time, productive investments are crowded out, as real resources are misdirected.

We could jump up and down and shout about this, or indulge in schadenfreude, but it is more useful to ask, what does this suggest for one's investment strategy? On the one hand, the success of Warren Buffet, for one, shows that straightforward value investing still pays. On the other hand, with not only human nature but now also central bank policy in all the largest economies standing unified to create bubbles, I suspect Jeremy Grantham is right to suggest that studying bubbles objectively, and learning to make money from them, should be part of every investor's thinking.