More Market Craziness

As I recently blogged, markets are not making sense.  One of the things I noted was gas prices, which are jumping back up a full month before Labor Day and without any change in the threat posturing in the Middle East.  Prices are going up because they just can.  I also commented about the crazy money going into multi-family housing.  This week I learned it's worse than I thought.  The cap rates on these projects are running as low as 4%.  There is much debate about what all goes into a cap rate, but for our purposes it is the annual rate of return an investor expects from an investment.  A high cap rate indicates a risky, volatile, short-term investment.  The investor needs a high rate of return to get its return and quickly flip the investment.  In contrast, a low cap rate indicates a safe, stable, long-term investment.  4% is low.  In fact to get lower, you have to go into the world of government and high-grade corporate bonds.  Serious buy-and-hold strategies with almost guaranteed returns.  Is multi-family construction that stable?  Not hardly.  Which means Mr. Market has a fire hose of money aimed at a sector that can't give adequate returns.  Just like the Dotcom Boom.  Just like mortgage-backed securities.  Just like oil shale and tar sands.  Which means we're just pumping up another bubble.  When people talk about markets, what they are really talking about is marks.  Don't be their next mark.