Friday, July 18, 2008

Flashback 2005: Ken Fisher Says He's Confident There's No Housing Bubble

Let me ask you, seriously, would you buy investment advice from this man?

Here's the advice Fisher Investments gave regarding the housing bubble in its Q3 2005 Stock Market Outlook. (Unfortunately, I can't link to it because I have it in hard copy. I saved it because of the ridiculous housing bubble prediction.) Summer of 2005, let me remind you, was the peak of housing bubble activity.
"Bubble" Paranoia is Good News

The Economist's June 18 cover story "House Prices—After the Fall" sums up the international mood—a global real estate bubble is on the verge of bursting. This fear is bullish. Real bubbles are seldom referred to as bubbles in the press until after they've burst, so there's little need to worry now. If there isn't a bubble, that's good news for stocks, the health of the global consumer, and in turn, the global economy.

The technology stock bubble burst just a handful of years ago but investors have already forgotten its origins. Remember that it wasn't much called a bubble until after it burst. Bubbles tend to occur when fear is replaced by phrases like "new economy" and "it's different this time." A healthy dose of fear reduces risk for investors. It's the wall of worry bull markets like to climb. We don't have a specific forecast for home prices from here and don't claim to be real estate experts, but we're confident there's no bubble to worry about.
Ken Fisher's reasoning here is flawed. I remember the late-1990s' stock market bubble quite well. There were lots of people warning about a bubble then, including—oops!—The Economist. Perhaps Forbes Magazine (which Ken Fisher writes for) wasn't warning about it, but many people in the press were. Did he forget Alan Greenspan's "Irrational Exuberance" speech? Bubbles occur, not due to a lack of warnings, but due to people disregarding the warnings in the quest for the quick buck.

Other advice from Ken Fisher in his Q3 2005 Stock Market Outlook: "The dollar rally should continue."


  1. Love the flashbacks. Keep 'em coming.

  2. But of course the bubble riders don't remember people calling 'em bubbles before the burst, because THOSE WEREN'T THE PEOPLE THEY WERE LISTENING TOO. Kind of like the current administration maintaining that the extended insurgency in Iraq was unforseable. It wasn't unforseeable, people forsaw it. But those weren't the people they were listening to.

    In all but the simplest endeavors, people will say different things. You really DO have to listen to a number of different viewpoints, hear them out and make a decision. Most people gravitate to the simple consensus position if there is one. If most people say A, than A it is, and we'll ignore the wingnuts, tinfoil hatters, non-conformists, radical right/left wingers who say B,C,D and on to Z. But after the fact, you'll often find out who was right. It's one thing to say that you went with the crowd and assumed you'd be safe. But don't say that you weren't warned.
    --Jim A.

  3. bostonbubble said...
    Love the flashbacks. Keep 'em coming.

    Hey, thanks. The next two flashbacks are coming on July 25 and July 28. To meet the three year anniversary mark, they both really should appear on July 28. But to give this blog more of an even flow, I decided to space them apart.

  4. The financial actors earn their money not from their own investments but from publishing books.


  5. Thanks for posting.

    Another flaw in his reasoning: "real bubbles are seldom referred to as bubbles in the press until after they've burst, so there's little need to worry now." In other words, what people call something causes it. If no one tells you that you seem to have lung cancer, then you don't have it. No need to stop smoking or go to the doctor...

  6. In defense of Ken against Anonymous...

    1.) He is one financial actor that has made much more doing his investement business than his books.


    2.) What he is saying is that IF the market believes there is a housing bubble, then that knowledge should get reflected in the price of houses. And therefore that risk should be "priced" as economists like to say. To put it another way... What people believe DOES cause price.

    To sum this up I see three alternatives. One, that the market did not believe there was a bubble. Or, two, that the market believed that the bubble would not be severe. Or, three, that ALL players in the market thought they could still come out ahead even through a bubble (this would be very interesting to analyze). It is almost certainly the case of the loan salespeople (not the same as the people loaning the money). But, I suspect the house purchaser often had a "worst case" scenario that did not consider absorbing all the costs of forclosure.