Friday, February 23, 2007

Asset Bubble

The Motley Fool has a fascinating article about the "Asset Bubble" - the idea that assets of all kinds: stocks, bonds, real estate, precious metals, other commodities, etc., are overvalued and that the situation constitutes a bubble. You should read the entire article but here is a small clip to whet your appetite:

"For 50 years following the end of World War II, the ratio of assets to gross domestic product stayed pretty constant at around 3.8-to-1. That means the market value of all assets held by households in the U.S. -- stocks, real estate, bonds, cash, tangibles, and the like -- roughly equated to 3.8 times one year of GDP. So if the economy grew, so did the market value of assets held, roughly by the same ratio, over all those years.

Then, in the latter part of the 1990s, something started to happen. The market value of the assets held by households started to rise more quickly than the gains in GDP. That 3.8-to-1 ratio jumped to 4.8-to-1 in 1997, 4.95-to-1 in 1998 and 5.27-to-1 in 1999, where it peaked. From 2000 to 2002, it came down, hitting a low of 4.54, but it has been on the rise again and is back up around 5.0."

You should read the article to get the actual analysis of the situation.


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