Way back in ancient times—September of 2006—Keith Tufte, president and CEO of Longview Wealth Management in Eden Prairie, kicked out an exceedingly depressing gloom-and-doom newsletter that posited the question: “Is the housing bubble about to burst?”
Ridiculous! Of course it wasn’t. Prices were going to the moon! Right.
Obviously, Tufte was onto something. A veteran money manager and analyst, Tufte’s pedigree includes a six-year stint at J. P. Morgan Investment Management, then 15 years as an analyst, portfolio manager, and director of equity research at American Express Financial Advisors (now RiverSource Investments, the investment arm of Ameriprise Financial). Most recently, he worked at Cargill-owned Black River Asset Management. He launched his own firm last year, focusing on investment management, tax advice, and estate planning. Tufte, by the way, is a long-time student of investment bubbles and their dynamics.
You were warning about a housing bubble in 2006. What market conditions tipped you off?
KT There are a number of things I look for in a typical investment bubble: the rapid escalation of prices beyond a normal historical pattern, the use of leverage, and buying the assets just because prices are going up, with little thought of valuation. In the housing bubble, people who typically weren’t investors in homes before were buying multiple homes—first-time homebuyers who couldn’t really afford them—and lots of people were buying second homes in parts of the country they weren’t really familiar with. The other thing you look for in bubbles is a huge increase in the supply of the asset. In this case, we saw huge increases in the new-home supply because the prices were so high.
Was there any indication back in 2006 that the housing bubble would also trigger the tremendous dislocation we’ve experienced in the fixed-income market—particularly in some of the exotic securities—and the financial sector in general?
KT Any time you have a financial bubble, a common theme is the increased use of leverage or some sort of creative financing that allows the bubble to get much more out of control than it normally would. In the housing bubble, we had the banking industry getting extremely lenient and creative with their lending standards. So at the time, I think it was obvious that the banks and people investing in mortgage bonds were going to be in trouble when the bubble burst. With the more creative fixed-income structures, it has taken people a while to figure out how much exposure they really had. That’s one problem we’ve had in this credit meltdown: A lot of these new creative structures were not very transparent.
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