Irrational exuberance in bubble investing

Posted: Sunday, June 22, 2008

Like most Americans, I hear about foreclosures and other tragedies of the housing bubble and think: Why didn't I make money off this? I felt the same sense of devastating loss in 2000, when tech stocks crashed and I didn't benefit. Also, unlike my sister, I choked on exploiting that period of generosity right after our parents' divorce.

So, for the last few months, I've been tempted to bet on the commodities bubble bursting. Sure, lots of investors think oil, gold and corn are not overpriced, claiming that increased demand from emerging economies has caused a legitimate, long-term price jump. But traders didn't just discover China on March 1, and the price of a barrel of oil has gone up more than 30 percent since then. Plus, although I'm not a trained economist, I'm fairly certain that one of the technical signs of a bubble is when commercials on late-night TV ask me to mail in my gold jewelry in exchange for cash.

But no one knows when a bubble will pop, which is why I've come up with a much safer, smarter investment plan: getting in on the ground floor of the next bubble. To figure out where people will idiotically dump their money next, I called Harrison Hong, 37, a Princeton University economist hired by then-professor Ben S. Bernanke to study bubbleology. Hong thinks the next bubble might be in "green" technology, because someone is going to make a lot of cash off inventing cheap solar energy panels, hydrogen cars or a way to harness Al Gore's glow of self-righteousness. Plus, Hong thinks a lot of the green investment is based on the notion that people can do good and still make money, a faulty theory that's also been exploited by some Nigerians with Internet access.

This sounded promising, but I, unlike Hong, do a lot of my economic research by watching rap videos, where I've noticed guys flashing euros instead of dollars. So my plan was to borrow a lot of cheap, low-interest dollars and buy rising, high-interest euros and British pounds -- which I would then reinvest in hot tubs, Champagne and ill-fitting bikinis.

Hong told me this plan was called the "Japanese housewife trade," which I immediately imagined pitching to Fox as a reality show, until he explained it. Because the post-'80s recession in Japan brought long-term deflation to the yen, Japanese housewives would take out very low-interest loans from their local banks (yen) and buy high-yielding U.S. Treasury bonds (dollars), and, more recently, euros and New Zealand dollars. The bubble was huge - Japanese citizens trading online were responsible for nearly one-fifth of all currency exchanged by early 2007 - until it popped in August. Which explains why they now do such embarrassing things on game shows.

Emboldened by the historical pedigree of my first investing strategy, I confided my other big idea: going on eBay and buying a whole bunch of stuff once owned by celebrities. "How big of a market is that celebrity stuff?" Hong asked. Which he followed quickly with: "Is celebrity crap that important?" Being in an ivory tower prevents you from knowing much about the real economy at all.

We considered other possible overheated sectors: nuclear power plants, biotechnology and wine. Then Hong suggested sustainable suburban agriculture, explaining that his dad in Dallas was learning how to raise chickens and make moonshine. Which then made me consider investing in the upcoming, ratings-blockbuster, Dallas episode of "Cops."

I'd also heard that the market in contemporary art was out of control, so Hong hooked me up with NYU economist Michael Moses, who helped design the Mei Moses Art Index and created

Moses said he considers a bubble to be at least 30 percent growth for five straight years. Post-World War II art has been close, he added, up more than 20 percent a year for the past five years. This seemed a little too bubbliciously far along, although hanging a Banksy in my living room would earn me more Hollywood street cred than creating an awkward scene at a tony restaurant by paying in euros.

I had decided to diversify my bubble portfolio - 40 percent in euros, 25 percent in biotech, 20 percent in green energy, 10 percent in art and the rest in celebrity crap and Texas chickens - when I realized that we might be in a bubble bubble. After all, between World War II and the mid-'90s, there weren't any bubbles. Since then, money has run scared from tech to real estate to commodities; eventually, isn't that money going to get tired and settle into solid, diversified, rationally unexuberant investing? So I'm going to stick to index mutual funds. But I'll be a tiny bit sad to live in a country smacked out of its inane optimism.

• Joel Stein is a columnist for the Los Angeles Times.

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