DENVER - Market bubbles are easy to spot.
Common-sense clues that the real estate market had built to an unhealthy height showed up years before the burst, though it's difficult to predict timing, said panelists at the conference.
"Bubbles have always occurred, and they always will," said Kevin Blakely, CEO of the Risk Management Association, a Philadelphia-based nonprofit.
The press has to recognize the signs and give them adequate coverage, despite accusations of negativity or fear of aggravating sources, panelists said.
"A house is people's wealth," said Dean Baker, co-founder of the Washington-based Center for Economic and Policy Research. "It should have been a huge story."
The largest current bubble is U.S. Treasury securities, said Allan Sloan, senior editor-at large for Fortune Magazine. There's enormous intervention by the government and an illusion of safety, he said. Low rates on bonds are the equivalent of them being very expensive.
What to watch for to recognize a bubble:
Rapid price escalation above market norms.
For a century, prices in the housing market generally rose on par with inflation. In 2006, they jumped 70 percent.
"Income wasn't growing like that," Baker said. "There was nothing on the demand side or the supply side that looked like an explanation."
Everything eventually reverts back to norms, Blakely said.
Related conditions don't match the trends.
Rental vacancy rates reached record levels, but should have been low, Baker said. With the 70 percent rise in housing prices, rents should have risen 35 percent to 40 percent, but they dropped in some places.
The gap since the last economic bubble.
"Financial knowledge is quick to disappear," Blakely said. Anyone in the industry younger than 38 has never experienced a meaningful downturn, he says.
Bubbles are driven by confidence, not fundamental values.
"Bubbles are similar to Ponzi schemes, except that one is legal, and one is not," Blakely said. "Both are built on confidence, and they work well until that confidence disappears."
Cash flow and real earnings are ignored, said Lynn Turner, former chief accountant for the Securities and Exchange Commission. Companies begin to present "funky numbers" that exclude negatives, he says, such as pro forma earnings and tangible common equity.
Low interest rates.
"A sustained low interest rate risk environment numb investors to risk aversion," Blakely said.
An abundance of liquidity.
Cash has to go somewhere.
Substantive changes in government laws, rules or regulations that can open the market to exploitation.
Typically, there's support for deregulation, Turner said.
Growth in the leveraged finance market.
The leveraged finance market - funding companies with above-normal debt - is a bellwether to gauge investor gullibility, Blakely said.
Sources will say that "this time it's different," or "you don't understand," Sloan said.
"Maybe it is different, but you should start thinking there may be a problem," he says. "Use common sense and skepticism."
Simple calculations - such as figuring how much values would have to increase over the next several years to support current prices - can reveal trouble, they advise.
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