A Quote by James Chanos
What we define as a bubble is any kind of debt-fueled asset inflation where the cash flow generated by the asset itself - a rental property, office building, condo - does not cover the debt incurred to buy the asset. So you depend on a greater fool, if you will, to come in and buy at a higher price.
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The problem is that you're creating a system of bubble finance where interest rates are so low that people can speculate. An asset value goes up. You put it up as collateral. You borrow against it. You buy more of the asset. You then take the rising asset. You borrow against it again. This is the nature of what's going on in the world. This isn't an excess of real savings. This is an excess of artificial credit that's being fueled by all the central banks.
Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices, ... This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.
When you default on a secured debt, the creditor takes the asset that backs up that debt. When you convert credit card debt to mortgage debt, you are securing that credit card debt with your home. That's a risky proposition.
If an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependment on what a future buyer might pay, then it's an investment. If an asset's value is totally dependent on the amount a future buyer might pay, then its purchase is speculation.
In the 40 years I've been working as an economist and investor, I have never seen such a disconnect between the asset market and the economic reality... Asset markets are in the sky, and the economy of the ordinary people is in the dumps, where their real incomes adjusted for inflation are going down and asset markets are going up.
When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.
Edge also implies what Ben Graham....called a margin of safety. You have a margin of safety when you buy an asset at a price that is substantially less than its value. As Graham noted, the margin of safety 'is available for absorbing the effect of miscalculations or worse than average luck.' ...Graham expands, "The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price."
Beauty is an asset, just like physical prowess, charisma, brains or emotional intelligence. The key with any gift is in the way that you use it. It doesn't define you as a person. Rather, it's an asset to be used judiciously and with an understanding of how it is just a small part of who you are.
The transaction cost approach maintains that some projects are easy to finance by debt and ought to be financed by debt. These are projects for which physical-asset specificity is low to moderate.
There's no such thing as a value company. Price is all that matters. At some price, an asset is a buy, at another it's a hold, and at another it's a sell.
Rule One. You must know the difference between an asset and a liability, and buy assets. An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket.
Unlike cheap stocks, inexpensive asset classes have a lower chance of big drawdowns (broad asset classes don't go to zero) and a higher probability of average or better returns.
A degree is an asset, but it doesn't mean anything by itself. It's just another asset. So is being persuasive, having good personality, being smart.
My net worth is the market value of holdings less the tax payable upon sale. The liability is just as real as the asset unless the value of the asset declines (ouch), the asset is given away (no comment), or I die with it. The latter course of action would appear to at least border on a Pyrrhic victory.
We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability.
Peace, for us, is an asset and in our interest. It is an absolute human asset that allows an individual to freely develop his individuality unbound by any regional, religious, or ethnic fetters.
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