Property Hub - Investment Insights & Inspiration - Get Invested: Part 1: Bushy Martin on the emerging asset bubble

Episode Date: March 19, 2021

After a period of radical uncertainty and rapid change, things appear to be going well, on the back of huge government spending, surging markets and increasing confidence. But are you still feeling anxious and uncertain about what’s happening in the world and where we’re heading? Are you hearing so many contrasting and conflicting opinions that you’re totally confused and just not sure what you should and shouldn’t be doing? Does fear tend to dominate your underlying thoughts and emotions? Fear of missing out on the rapidly expanding boom times that we’re currently experiencing mixed with fears that it may all coming crashing down around our ears overnight, due to another unexpected global shock? Are you experiencing an insidious undertone of fear that’s quietly colouring your outlook and your actions? Particularly in a world that just doesn’t seem to make any sense, a world that seems to have gone crazy because what is actually happening seems to be the opposite of, or at odds with, what we expect to be happening – a world that seems to have separated from reality, where what is going on seems to defy all logic and reason. If this is how you’re feeling, then join the club – you're in good company. So today I thought I’d try and help you make some sense out of the madness so that you can alleviate some of your anxiety by starting to get a better understanding of what is going on, why it is going on, and grasp an understanding of what it all means and what can you do about it, now and in the future, to both protect your position and take advantage of the inevitable opportunities that always accompany periods of great change and uncertainty.   Listen to part 1 of this analysis of the emerging asset bubble. In the meantime, if you’d like to optimise your performance in property investment, Bushy is taking investors to new heights in his unique Freedom Flight program ... giving you access to live, interactive information sessions and Bushy's unique portfolio planning process. To book your ticket or find out more, click here:  https://knowhowproperty.com.au/freedom-fighters Get Invested is the podcast dedicated to time poor professionals who want to work less and live more. Join Bushy Martin, one of Australia’s top 10 property specialists, as he and his influential guests share know-how on the ways investing in property can unlock the life you always dreamed about and secure your financial future. Remember to subscribe on your favourite podcast player, and if you're enjoying the show please leave us a review. Find out more about Get Invested here https://bushymartin.com.au/get-invested-podcast/  Want to connect with Bushy? Get in touch here https://bushymartin.com.au/contact/  This show is produced by Apiro Media - http://apiropodcasts.comSee omnystudio.com/listener for privacy information.

After a period of radical uncertainty and rapid change, things are going well. The government has spent massive, unheard-of amounts of money on stimulus packages to encourage spending and to restore confidence. The middle class are comfortable and have come through the pandemic unscathed. Technology is continuing to take off and make new advances. The Central Reserve Bank has dropped rates to historic lows and the government has borrowed millions and billions to build infrastructure and create jobs and has begun buying bonds, which is code for printing money.

So there's lots of cheap money that's easy to get sloshing around in the economy. Prosperity and wealth are becoming the new normal and everyone's investing. The stock market and other investment asset values are soaring higher and higher to record levels. Interest rates have been lowered by the Central Reserve Bank to historic record lows,

so you're actually losing money by leaving your savings in the bank. And because lending rates are so low and loans are easy to get, it's seen as better to borrow very cheap money on margin to invest in shares and other money market vehicles, because everyone is getting in on the action and no one wants to miss out which results in share and stock prices and other investment vehicles climbing even higher.

And all this growth is attracting lots of new investors who have never invested before and know very little about what they're investing in. They're investing their savings and borrowing against their home so they can then invest quickly in growing popular opportunities that everyone else is investing in because they just don't want to miss out. Everything is booming and the happy days are here again. Does this sound familiar?

Where is all this heading and what does it mean for you? Welcome to the Get Invested podcast where we share great conversations with experts from all walks of life to uncover their secret know-how and where they invest their time, their skills and their money and the benefits that this has created. You see, the truth is that everyone invests. Every minute of every day, we're investing our time, our skills, our energy and our money in something.

Some of us are investing consciously, some unconsciously, sometimes for good, sometimes for bad, sometimes for no impact. get invested will help you to start living by design not by default i'm going to help you to make it happen not let it happen you'll hear the top tips on how you can live with conscious intent so that you can live more work less and leave a living legacy by investing now listen to the show to discover the top tips on how to get started make the most of your investment journey and ultimately to be living your dream not someone else's more episodes can be found on iTunes or at bushymartin.com.au forward slash getinvested. Thanks for listening and now let's

get invested. Hi Freedom Fighters. Are you still feeling anxious and uncertain about what's happening in the world and where we're heading? Are you hearing so many contrasting and conflicting opinions that you're totally confused and just not sure what you should and shouldn't be doing? Does fear tend to dominate your underlying thoughts and emotions? Fear of missing out on the rapidly expanding boom times that we're currently experiencing? Or mixed with fears that it may all come crashing down around our ears overnight due to another unexpected global shock? Are you experiencing an insidious undertone of fear that's quietly colouring your outlook and your actions? Particularly in a world that just doesn't seem to make any sense anymore.

A world that seems to have gone crazy because what is actually happening seems to be the opposite of, and quite often at odds with, what we expect to be happening. A world that seems to have separated from reality, where what is going on seems to defy all logic and reason. If this is how you're feeling, then join the club. You're in good company. So today, I thought I'd try and help you make some sense out of the madness, so that you can alleviate some of your anxiety by starting to get a better understanding of what is going

on, why it's going on, and grasp an understanding of what it all means and what you can do about it, both now and in the future, to both protect your position and take advantage of the inevitable opportunities that always accompany periods of great change and uncertainty. In the opening to today's episode, I described a very rosy picture of where things are at. But do you know what period of time I was actually describing? Was I describing the current emerging post-pandemic roaring 2020s? No. You might be surprised to hear it's not today I was talking about.

I was actually describing what life was like during the roaring 1920s after the global Spanish flu pandemic well over a century ago. And interestingly, it very closely mirrors the times we're currently in. It sounds equally applicable now as it did then. And do you know what immediately followed those times? The Great Depression of the 1930s. Now, I'm not trying to scare you here, not by any stretch of the imagination, but we're a lot smarter and our governments and central banks have the proven ability

to manage the economy through challenging times as they proved that they could following the GFC and now COVID-19. But I'm wanting you to become aware, to open your eyes to see what is really happening so that you can take advantage of the times we're in and the times that may be coming. As I've said on many occasions before, again quoting Warren Buffett,

what we learn from history is that we don't learn from history. and perhaps even more appropriate in today's context is Winston Churchill's immortal quote that those that fail to learn from history are doomed to repeat it and the key words here are fail to learn because I keep hearing that our times are unique and unprecedented that this time is different

which is always a massive alarm bell but the reality is that what we're going through has happened many times before over the dim distant past. The only difference is that the present is wearing new clothes. So what is happening right now in the world of investing? What are the contrasts, the contradictions

and what is the craziness? On the one hand, the global COVID crisis has resulted in economic woes for most nations and continues to threaten overnight lockdown and shutdown instability despite the beginnings of the vaccine rollout, resulting in high unemployment

and a reliance on ongoing government stimulus to prop things up. Many sectors of the economy, like tourism, hospitality, travel and bricks-and-mortar retailing, continue to struggle for survival, while others have benefited from the rapid change in circumstances like home deliveries, game makers, home gym equipment, home improvement, hardware, and of course, good old Zoom video meetings. But while the overall economy has suffered financially, investment and asset markets have been experiencing soaring growth after the initial knee-jerk reaction and overnight

correction to the coronavirus that occurred early in 2020. And in recent months, we've started to see some absolutely crazy investment behaviour. It appears that just about every man, woman, child and their dog is getting in on the action. And I always get nervous when everyone from the Uber driver to the local barista or the checkout attendant is bragging about what shares or crypto they're buying and how much money they're going to make. instant ignorant investors or should I say gamblers acting purely on others unfounded opinions which I believe is very dangerous territory everything appears to be pointing to an emerging overinflated potential asset bubble

and eventually all asset bubbles pop it's just a matter of when and how big the resulting correction will be so why this massive disparity and widening gap between struggling economies versus booming financial asset and investment markets and what does it mean to you and your investment and what can we and should we be doing about it let's start by determining if we're actually experiencing a bubble now a bubble is an economic cycle that's characterized by the rapid escalation of asset prices and market values. So a bubble, in an economic context, generally refers to a situation where the price for something, be it an individual stock,

a financial asset, or even on an entire sector, a market or an asset class, exceeds its fundamental value by a large margin in a relatively short period of time. So let's begin by having a good look at what's happening in the US equities markets, as it actually represents over 60% of the value of the global equities markets. So in simple terms, if the US stock exchange is getting a cold, the rest of the world immediately starts sneezing. And one of the measures that's commonly used to assess the relative value of a stock or share index is the price-to-earnings ratio, or what's called the PE ratio.

In simple terms, the P.E. ratio measures the current share price against its future earnings per share. So a high P.E. ratio means that a company stock may be overvalued or that investors are expecting high growth rates in the future. A higher P.E. ratio shows that investors are willing to pay a higher price today because of higher growth expectations in the future. Now, the long-term average P.E. ratio is about 17. Simply put, a P.E. ratio of 17 means that the current market value of the company is equal to 17 times its annual earnings. In other words, if you were hypothetically to buy 100% of the company's shares, it would take you 17 years to earn back your initial investment through the company's ongoing profits. Looking at the US stock market S&P 500

which combines most of the individual company shares the current PE ratio is over 34 and this is up over 52% from just a year ago and is 77% above the modern era average As an example, Amazon's current PE ratio is 73 Against this backdrop, Elon Musk's company Tesla has literally rocketed to a P.E. ratio of over 1,100, with its share price surging over 665%. And Tesla has surged more than 20,000% since its first going public in 2010. And apparently Tesla has become not only the most valuable car company in the world,

but also now more valuable than all the other car companies combined. Now, while Tesla is producing some great electric cars, even the high-flying frontman Elon Musk has publicly tweeted that Tesla's stock price is too high. So price-to-earnings ratios are well above their long-term averages, and certainly by this measure the share market in the US and many other countries is starting to look very expensive. So does this all sound overvalued? Well clearly the current PE ratios are an indication of a stock market

that's trading way over its normal value with many companies appearing to be potentially overvalued. By this measure and many other industry measures that I won't bore you with the US stock market and many other stock markets that are trading at or near their all-time highs including portions of the Australian Stock Exchange certainly appear to be entering a bubble. We've also seen the sudden rise of what has now been dubbed

meme stocks which are stocks and shares that have become popular with first-time and millennial-aged retail traders where the affected company's stock prices have been driven up more by social media and blog forum herd hype than their underlying fundamentals. The sudden inexplicable meteoric rise of the failing GameStop share price via Reddit's WallStreetBets forum has been the most extreme and most reported example, where an online

herd of individual investors, influenced by a convincing opinion-based story, saw GameStop Shares rise in price by 1,700%, and that was this year in just six weeks, and they're up more than 8,000% over the past 12 months. This is in comparison to the S&P 500 index that has increased only 4% in 2021 and is up 35% over the past 12 months. Similar meme stock rollercoaster ride price volatility has also been experienced with other previously struggling and potentially dying companies

including the cinema group AMC Entertainment Holdings and old and outdated mobile phone companies like BlackBerry and Nokia There's even been a case of a bankrupt company seeing its stock price rise five times in value and to add insult to injury and further extended magnify the investor craziness. An investment firm has recently listed

a meme stock exchange traded fund or ETF called Buzz. Now an ETF is a type of investment fund that combines a basket of securities that tracks an index, a sector, a commodity or other bundled asset and can be purchased or sold on a stock exchange the same way as a regular share or stock can. Now Buzz will track an index of US stocks that are getting mentioned often

in investment related posts on social media, news articles and online discussion forums Enter the influence of mass perception investing and the age of illusion But bubbles and or similar sudden stratospheric rises in prices and exponential increases in values are being experienced across a range of what appears to be highly overvalued financial instruments. In precious metals, both gold and silver reached their all-time price highs in August last year, with gold tracking downwards since then, and silver's been trading in a sideways band ever since. And then, of course, there's the surreal world of cryptocurrency and its poster child, Bitcoin.

In the last 12 months, the value of Bitcoin has risen exponentially, with a couple of short-term drawbacks, from just over $7,000 to over $77,000 in Aussie dollars at the time of this recording. That's a jump of over 1,100% in a year. Clearly, this is a feeding frenzy. And according to a recent Forbes article by Dan Runcovicius the world's number one cryptocurrency has drawn an impressive $700 billion in investment funds since last September

And while rumour has it that institutional investors are behind this JP Morgan data shows that only $11 billion of Bitcoin inflows have come from institutional investors In other words, Bitcoin is still mainly being driven by a gathering herd of individual investors. And it's for this reason that J.P. Morgan advises against using Bitcoin as a hedge against a downturn in stocks that may have been bid up by individual investors. They comment that the mainstreaming of Bitcoin is now raising its correlation with shares and equities. Since holders of Bitcoin and single-name stocks have the same risk preference around macro shocks such as interest rates, etc.,

there's now a risk of simultaneous deleveraging in both shares in crypto, which is investment-speak for the fact that both of these investments are likely to fall with a drop in speculative confidence. Interestingly though, and this is a significant shift, JP Morgan strategists think cryptos do deserve a place in an investment portfolio and they say that in a properly diversified multi-asset portfolio they suggest that investors can likely add up to 1% of their allocation to cryptocurrencies. This is saying that only 1% of your investment should be in crypto

due to the inherent risk associated with this extremely speculative asset class and unfortunately I've seen a lot of people putting way more than that into this very risky asset. So does all of this sound a tad overvalued to you? Is it just me? Or is there a common theme developing across a lot of financial instruments and asset classes here? Bastardising the old looks like a duck analogy.

If it walks like a bubble and talks like a bubble, then it probably is. coming into a bubble. And to add some science to this, let's apply the current investment market position to the great framework detailed in the book Boom and Bust by William Quinn and John Turner, who go through a global history of financial bubbles to create a simple triangular model, appropriately dubbed the bubble triangle. Now, Quinn and Turner's study of over 300 years of bubble history. He deals that for there to be a bubble, there are three necessary conditions that need to be met that make up each side of the triangle. And these three

conditions are marketability, an abundance of money in debt, and speculation. Marketability is the ease with which an asset can be bought and sold. Bubbles can't happen unless assets can be easily traded. Secondly, money and debt provide the fuel for the bubble, encouraging investors to reach for yield or to borrow to buy assets. And thirdly, speculation is the investment strategy of buying assets you expect to rise in price in the short term, hoping to make a quick profit. Now during historical bubbles, novices and newbies have often become speculators. So are these necessary conditions present today in the stock markets?

In a recent article the authors penned in the Cambridge blog, the answer appears to be a resounding yes. Working through each side of the bubble triangle, firstly, marketability is clearly evident as stocks and shares are easily traded and accessed thanks to zero-commission brokers like Robinhood and other free share trading, online platforms, algorithms and AI robotic trading systems which have all combined to amplify and accelerate trading activity.

As an example, according to Raman Charles Nakissa, However, net inflows into the US equity market by retail investors, who are just normal investors like you and I, over a recent week, there's been about $32 billion that flowed into the equity market in the US, which is roughly a tenfold increase in the level of inflows that were being experienced back in 2019. So we can certainly tick off that side of the triangle. Anyone can now trade anywhere at any time for next to nothing Trading has been fully gamified On the second side of the bubble triangle money and debt access fuel is super abundant due to near zero interest rates record levels of quantitative easing which is code for printing money

with the US government apparently printing 40% of the total amount of greenbacks that have ever existed in the last 12 months. Increased access to money and debt has been further fuelled with other extraordinary stimulating measures like the just released $1.9 trillion Biden package, the 2.2 trillion euro package and Australia's $320 billion big stimulus, which is equivalent to 16% of our gross domestic product, or GDP.

And this is actually double that of the UK on a per-person basis. All of these government-instigated measures have pumped bucketloads of cash into the economy, and a big portion of which has been invested in investment assets. And finally, we consider the third speculation side of the triangle. Now, let's define speculation as people who buy investments regardless of the price they're paying with the attitude that valuation is irrelevant. You just buy an investment asset because it's going up.

Now, this has certainly been evidenced in a significant increase in stock market momentum since the pandemic crash in March 2020. so it appears that we are seeing clear signs of active speculation. This is backed up by clear anecdotal evidence that many people are giving up their jobs and becoming day traders or selling property so that they can speculate their house on cryptocurrency. In summary then, it's clear that all sides of the bubble triangle are present to provide the necessary conditions for an emerging bubble.

However, for a bubble to happen there needs to be an external spark. Now sparks for historical bubbles either came from major new technical innovations such as electrification or the internet or more commonly significant changes in government policy. And these sparks are very difficult to foresee. In most cases these sparks initially have a significant effect

on the real value of assets. The internet for example was a really transformative new technology that revolutionised the economy and ushered in a new generation of spectacularly profitable firms. But by 1999 and 2000, speculation had driven internet stock prices to a level that even the potential of the internet couldn't justify. A major potential spark for a current bubble occurred as a response to the global pandemic in March last year,

When central banks use substantial quantitative easing, read printed massive volumes of money, to arrest a stock market crash and underpin the economy. Since then, after a short knee-jerk dip, stock markets across the developed world have risen sharply, leading many commentators to suggest that stock markets are in a bubble. However, rapid price rises may be a rational response to the realisation that the authorities are effectively underwriting assets including the stock market. And just like during the dot-com bubble, however, this logic can only carry so far, especially when short-term share traders start buying shares on borrowed margin just because they're rising.

And a flood of first-time novice investors are piling money into the market for fear of missing out, or what's commonly referred to as FOMO. So, against the bubble triangle framework, all of the signs suggest we're transitioning into a potential bubble. Now, let's consider some other investment bubble indicators. According to a recent article by Traceview Finance, there are three ways to identify stock market bubbles. Firstly, look for signs of FOMO, the fear of missing out.

It's often the primary and psychological engine that drives market fads into the stratosphere until there are virtually no more buyers or greater fools to continue the ascension. Secondly, an investment becomes normal conversation material. Bitcoin's a classic example that's currently on everyone's lips. And thirdly, the market fundamentals no longer seem to matter. Expanding on these Traceview Finance article observations, Psychology and human behaviours, including irrational greed, coupled with high-frequency computer or algorithmic trading, sometimes cause certain asset classes to become widely overvalued and deviate from the true underlying value.

Just like people who may not be true fans like to jump on the bandwagon of successful sports clubs and sports teams who rarely lose, like the mighty Richmond Tigers, bubbles form when the crowd of investors, and often newbies, pile into and hype up a certain stock or asset class such as Bitcoin until the fad ultimately ends and the value plummets back to a more realistic level. So how do they think you can tell

if your investments or certain sectors are in a bubble that is at risk of bursting? Well, let's dig in a bit deeper. Start looking for signs of FOMO. Greed and a get-rich-quick mentality are often two negative human behaviours that can contribute to investors bidding up shares or assets to the point where there's nowhere left to go but down. Most well-informed seasoned investors have a diversified portfolio of shares,

ETS, mutual funds and bonds that generate long-term average returns between 6% to 12% a year, depending on their diversification. As an example, investors who are 100% invested in the US S&P 500 share market generally anticipate long-term annual returns averaging 10%. So, while steady returns historically generated by a broad-based index fund have proven to build substantial wealth over the long term, most novice investors chasing a market fad would scoff at the idea of only making 10% on their money

and for current Bitcoin aficionados a 10% move could be in a single day during the height of the craze. This mentality and a mass of new and inexperienced investors needing to achieve vastly outsized returns is an obvious sign of a bubble starting to form. And while traditional investors are often partially to blame for anticipating and joining in behaviours that could result in a bubble forming One of the biggest signs that a particular share or asset class is showing bubblish tendencies

Is when non-traditional investors suddenly become instant overnight experts And begin pushing what could be seen as a new market fad When inexperienced investors with no prior market experience suddenly come out of the woodwork advocating that things like crypto and marijuana shares are the best places to put your money purely on the basis that they've doubled or tripled their money in a short period of time

which is exactly what's currently happening then this is a sure sign you could be looking at an emerging investment bubble If there's no other basis for making an investment other than recent price increases and this fact is driving the price up based on the greater fall approach where you're relying on a greater fall paying more than you have chances are you could be looking at an overvalued asset class that is ripe for a price pullback

So how does FOMO on huge gains cause bubbles? Well, when no more demand exists for a particular stock or asset, the price will naturally fall until either buyers pick up the shares at discounted prices, or panic ensues and even more severe drops occur. Generally, if there is real value in the underlying business, the price will be too cheap to ignore on a pullback. Buyers will then swoop in to take advantage of the lower levels. Conversely, if there's not a whole lot of value in the business, or the entity,

and the price has been inflated by novice investors and trend followers for no rational reason, there will more than likely be a mad rush for the exits. This fire sale results in the bubble bursting, which is actually what happened with crypto a few years back. Now, Tracey Hughes' second bubble indicator is when an investment becomes normal conversation material. Unfortunately, the vast majority of people have absolutely no interest in following the investment markets on a daily basis. Let's face it, all of that goobly-gook and jargon can be extremely boring. As a culture, one of our unspoken rules is to avoid money talk and finances in general conversation.

Therefore, one of the biggest indicators that an asset class is overvalued occurs when everyone who does not have traditional investments or doesn't follow the market regularly suddenly becomes a market expert on a particular investment. For example, if the Uber driver you meet or the local bartender begins to tell you to buy marijuana stock or a particular cryptocurrency because of how much they've made in a very short period of time, chances are there's a bubble in that asset class

and pure euphoria and gold rush fever is the driver of the price increase not the underlying fundamental value of the business or the asset. So you need to also start looking for obsessive media airplay because another sign that the value of an investment asset has gone up beyond its true worth is when news organisations begin running stories highlighting the rapid increase in value.

When the nightly news begins running specials highlighting the epic run of the value of Bitcoin, there's a good chance this could be contributing to the craze. Because news organisations rely on viewers and will only hear what they think will bring in the biggest audience, they'll often pull stories that will be popular for the average person. Now during booming investment market bubbles everyone suddenly becomes aware of the financial markets and new sources will cater to this sudden demand for headline grabbing financial news Another sign of sudden popularity occurs when completely new classes of financial products

are created by financial firms around emerging investments such as cannabis plays, cryptocurrency ETFs or the Buzz Index ETF I described earlier. These are further signs that there's a significant likelihood that there's just too much hype in these industries or assets for you to be investing in them at a good price. After all, the primary focus of these financial firms is to make money. So feeding off the frenzy is logical for them.

Now, Traceview's third sign of an investment bubble is when the fundamentals no longer seem to matter. In general terms, the value of any business can be determined based on the cash flow and the earnings it will produce for its remaining life. Generally, companies that are in the growth stage of their lifestyle will receive a higher valuation from investors compared to more mature or declining businesses. This is because, as the business grows, its earning and cash flow also increase each and

every year, which justifies the high valuation. While it's perfectly reasonable for valuations for growth-orientated businesses to be higher than the average company in the market, sometimes bubbles form in these industries that are new and growing or disruptive, and taking market share in a particular segment of the market. this can also result in too much credit too soon often the company in a particular growth or trendy industry will have extremely high revenue growth but deepening unsustainable losses and no proof that they can become profitable now while this is not a guaranteed sign that

business is doomed for bankruptcy, as virtually every successful and now mature company has operated at a loss at some point in their history, losses can't be sustained in the long term. If investors don't require the company to grow responsibly and simply bid up the share price because of revenue growth and the industry is new and hot, the fundamentals might not reflect the true value of the business. Eventually, investors may decide they have made enough money on the inflated stock price, sell their positions and the value will drop like a brick. Also, prices can inflate beyond the fundamental value. As we touched on earlier in my discussion about price to earnings ratios, when the price of the asset increases rapidly and goes well

beyond what the fundamentals and future earnings would justify, the stock or asset could be a bubble territory. Companies that are in new emerging industries and are losing money are often the places that fat investors look to capitalise on big returns. In order to capture the gains, they'll have to jump off the sinking ship before everyone else heads for the lifeboats. Otherwise, they risk losing everything along with everyone else when the bubble inevitably bursts. If the fundamental financial story of the company doesn't align with the market value, chances are that investors are too excited and the future prospects may be over-exaggerated.

And now let's consider the impact of what's called irrational exuberance. Much of this Sentiment can be captured by what Nobel Prize winner and successful economics and equities author Robert J. Schiller termed irrational exuberance in his book of the same name that was published in the run-up to the dot-com crash of the late 1990s. Irrational exuberance is unfounded market optimism that lacks a real foundation of fundamental valuation but instead rests on psychological factors.

A rational exuberance has become synonymous with the creation of inflated asset prices associated with bubbles, which ultimately pop and can lead to market panic. So let's break down a rational exuberance. In a more detailed sense, a rational exuberance is widespread and undue economic optimism. When investors start believing that the rise in prices in the recent past predicts the future, they're acting as if there's no uncertainty in the market, causing a positive feedback loop of ever higher prices. It's believed to be a problem because it can give rise to bubbles in asset prices. But when the ultimate bubble bursts, investors quickly turn to panic selling, sometimes selling their assets for less than they're worth based on fundamentals.

The panic that follows a bubble can spread to other asset classes and even lead to a recession. The investors who get hit the hardest, the ones who are still all in just before the correction, are the overconfident ones who are sure that the bull run will just last forever. and trusting that a bull won't turn on you is a sure way to get yourself gored. He also talks about herd behaviour and epidemics. In particular relevance to our current environment, he discusses his views on epidemics and herd behaviour.

He says that as humans, we rarely think independently and tend to do things simply because somebody else has done it. Not surprisingly, this is known as herd behaviour and investors fall very prey to this. People are so influenced by others that they override their opinions when they hear that a majority of people have different opinions. Shiller evidences the experiments conducted by Gerard and Deutsch that prove that even rational humans believe that the majority

is always accurate when compared to their own individual opinions. For instance, if someone is asked to choose one restaurant between two restaurants with absolutely no information about them, he will simply choose one of them randomly. However, if another person is asked to do the same and they see the first person entering one restaurant, they're more likely to enter the same restaurant just because they saw another person doing so. Think back, I'll bet you'll catch yourself doing the same. Now let's look at the impact of what I call the COVID catalyst or catalytic converter. Because from where I sit, global economic responses by governments and central reserve banks to the pandemic has created

the perfect storm for the widespread accessibility, acceleration and amplification of investment asset price booms in most parts of the developed world. All this all boils down to the forced creation of two key things, lots of extra time and lots of extra money. In governments well-intentioned attempts to stave off or minimise any recession or depression resulting from the forced sudden shutdown and lockdown of the economy, which I've got to say they've very effectively done in Australia, they've poured billions of extra dollars into the hands of all and sundry in an understandable attempt to promote spending on goods and services to preserve employment and incomes.

At the same time, many have been left twiddling their thumbs at home, with the internet being their only connection to the outside world. So, what do you do when you've got more money and lots of time on your hands? Yes, some spend it on home purchases. Some pay down debt. Many more save the money that they can no longer spend on going out or going on holidays. And a lot start investing in appreciating assets or speculating in high-risk but high-potential return instruments like crypto or gambling on online casino and betting or game sites.

All in the hope of getting rich quick. Why? Because dropping interest rates to as low as they can go in order to reduce the cost of meeting loan repayments, both for the government, companies and individuals, means that you're actually losing money and going backwards if you leave it in the bank once the impact of tax and inflation is taken into account. And this has particularly hit the large and growing number of retirees who have seen their income plummet where they've been relying on interest and dividends. In addition, superannuation funds with massive war chests are forced to move monies into riskier investments in the hope of higher returns.

In combination with a relaxation in lending laws, easier access to much lower-cost loans also means that we're much more likely to borrow money to leverage into everything from cars to properties to shares and other investment instruments, with crypto included. This rare combination of widespread access to lots of extra low-cost dollars and historically low-cost, easy-to-get loans, together with lots more time to do something with it,

has resulted in a rush of no-cost or low-cost leverage investment especially in tradable financial instruments via zero-fee platforms like Robinhood. Let's look at what impact this is having on Australian and American borrowings. In Australia, the ratio of household spend to income has more than doubled in recent years from 104% to a high of 212% according to OECD data revealed by finder.com.au. This means if the average Aussie earns 80 grand net, they're spending just under 170 grand a year.

And according to the most recent CoreLogic figures, Australian household debt levels have increased substantially over the past 30 years, with the ratio of household debt to annual disposable income rising from 68% in June 1990 to a recent peak of 188.5% in June 2019. But pleasingly, since June last year, the ratio has reduced slightly down to about 185%. Now, while many other developed countries have seen a decline or a levelling out of personal debt since the 2008 global financial crisis, Australia's debt levels have continued

do increase. As a result, Australia is now reported to have the fourth highest personal debt levels in the world, with the average Australian household owing $250,000, with total national consumer debt of over $2 trillion. Now, on the positive side of this, the majority of it can be defined as good debt, with roughly 56% going to home loans and about 37% to investments. So that's a total of 93% of our personal household debt being spent on potential wealth creation. This compares to the American ratio of household spend to income that's currently around about 112%.

The average household debt in America is about $143,000 with total consumer debt sitting at a record high of over $14 trillion US according to the Motley Fool report. Interestingly though, however, due to the significant drop in loan interest rates, repayments have been kept at very manageable levels and in a lot of cases have gone down.

In Australia, a recent AMP Natsim report shows that the typical ratio of debt interest repayments to disposable household income is sitting at around 6%. Now, this compares to the average American currently spending under 9% of their monthly income on debt payments, which has dropped down a whole percent from 2019 due to drops in interest rate relief. Again, according to figures quoted by the Motley Fool. And these high debt-to-income ratios mean that an increase in interest rates could have serious economic consequences. However, the central reserve banks have repeatedly made it clear

that they will do whatever it takes to support the housing market and to ensure that low interest rates will remain in place until the country returns to full employment and inflation returns to the target range Many industry commentators have projected that this will mean that rates will remain low for at least the next three years with others forecasting that current rates will be with us for the next decade. So reflecting on all of this, by any measure,

we appear to be moving into a potential bubble in some assets. But again, to me, this doesn't fully capture the full story of where we're at, why, and what we need to do about it. Hey there, Andrew Montessi here. I'm the producer of Get Invested, and you'll be hearing more from me from time to time. Now that you know where investment markets are at and why we're here, Bushy will continue to share his insights on investing during a boom and avoiding the bust next episode. The concluding chapter will focus on what investment options you have

and what signs to look out for. So stay tuned so you can take advantage of the current opportunities. In the meantime, if you'd like to optimize your performance in property investment, bushy is taking investors to new heights in his unique freedom flight program giving you access to live interactive information sessions and bushy's unique portfolio planning process