The Bubble Oracle

When the housing market was peaking, a lot of commentators asserted that the unwinding of that market was going to be more of a “slow-motion collapse,” given the long-term nature of real estate investments. Have you been surprised at how quickly this bubble has burst?

KT I really haven’t. If you look back at the history of investment bubbles, they always unravel rather quickly. It just feeds on itself, and people are always surprised by how quickly it happens.

Did you anticipate that the shock waves from this collapse were going to be as widespread as they’ve become?

KT I think most people have been surprised at how far and how quickly this has spread. Many of the large banks in Europe and Asia have run into significant problems because of U.S. subprime mortgage exposure, which is something I was surprised at and many others were, too. In addition, [the problems] spread to many other kinds of securities that many of us thought were safe, such as the money-market funds.

The late economist Hyman Minsky theorized that markets tend to lurch from crisis to crisis. Do you believe that we are doomed to stumble along, from bubble to bubble to bubble?

KT When one looks at history, we’ve had some sort of investment bubble once or twice every decade. Investors have short memories. You would think they would learn from one bubble to the next, but as 5 or 10 years pass, people tend to forget. The problem is human nature; people get greedy, and everyone wants in on the party.

Some have argued that we’re in a commodities bubble right now—in particular gold. What do you think?

KT I think the most recent bubbles right now are the Chinese stock market and to a lesser extent the short-term Treasury bond market. Massive amounts of money have rushed into the Chinese market over the past few years, and into the U.S. Treasury bond market over the past year. Commodities and the oil market are also showing many of the signs of a bubble. In all cases, commodities are subject to the whims of supply and demand, psychology, and greed and fear. Those asset classes have all had huge runs, and I think the forces of supply and demand are likely to bring them back to some sort of normalized price levels, as they always have.