Where to Invest When (Almost) Everything’s in a Bubble

The comments above & below is an edited and abridged synopsis of an article by Charles Hugh Smith

Now that almost every asset class is in a bubble, where to put one’s capital is a problem. The wealth consumed by the 2008—2009 global financial meltdown is still a concern to those who didn’t recover, so buying assets at today’s valuations in the hope of earning another 5% aren’t compelling to anyone pursuing common sense risk management.

Some basic principles will serve us well when bubbles abound: Risk cannot be eliminated; value flows to what’s scarce; many things that are scarce (valuable) cannot be bought on the global marketplace; comparing the relative value of various assets helps identify what’s relatively overvalued and undervalued.

Today, commodities are looking decidedly unbubblicious. Many commentators have noted that commodities such as precious metals, agricultural products, fertilizers and so on are considerably lower than their recent peaks.

So one possible strategy would be to sell that apartment complex you bought that’s doubled in value over the past few years and use the proceeds to buy some commodities that look beaten up, ignored or simply low in their historic range.

This doesn’t mean commodities can’t or won’t go lower, or the apartments can’t or won’t go higher; remember, risk cannot be eliminated. It’s an exercise in risk management and making an assessment of what’s more or less likely to happen over the next few years. It’s an exercise in hedging gains by seeking exposure in assets that may become scarce and thus more valuable in the near future.