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I have written in the past about the culture of America becoming a culture of gambling. The evidence is seen in people buying stocks despite minuscule yields and historically overvalued prices; it is seen in the wide acceptance of “junk” bonds; it is seen in the rampant speculation in real estate; and it is seen, most obviously, in the popularity of poker-realted television shows and web-sites.

What I have not discussed adequately is the risk participants in today’s asset markets face. People buying stocks, many types of bonds and real estate, are playing Russian Roulette with their finances. There is a live round in the chamber and it represents the makings of a crash.

Admittedly, a crash in the financial markets is a rare thing. A crash in real estate is even rarer still. However, every crash I can think of has occurred when prices were inflated beyond reasonable levels.

The stock market crashes of 1929 and 1987 followed bull markets that carried prices too far by valuation measures. (Not even as high as today’s levels, however.) The Los Angeles real estate boom of 1887 and Florida real estate boom of 1926 both ended in crashes. Real estate in Japan, after exploding in price through the 1980’s, didn’t technically crash but after more than a decade of annual price declines I think any Japanese would probably say it has been even more painful than a crash.

The lesson to be learned from history, a lesson that the general public has obviously not discovered, is that overvaluation necessarily leads to sub-par returns and, at times, crashes in the asset markets. Overvaluation is a bullet in the chamber.

I am not suggesting, in any way, that a crash is on the horizon. I am merely suggesting that there is a greater-than-normal chance we may see a crash in one or all of these markets at some time in the future. After all, while five of the chambers may be empty, the sixth is, indeed, loaded and American “investors” just keep smiling and pulling the trigger.

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