Bubbles: No One Has Any Idea What's Going On

By my count, we now have a stock bubble, a bond bubble, a gold bubble, a (new) housing bubble, a Bitcoin bubble, a debt bubble, a profit bubble, a margin bubble, a Fed bubble, a dividend bubble, a social media bubble, a health care bubble, and an [insert thing you don't like] bubble.

The word "bubble" didn't exist in economic textbooks 20 years ago, according to Yale economist Robert Shiller. How can something we didn't talk about before the mid-1990s suddenly infect every inch of the global economy?

The fact that no one talked about bubbles just two decades ago is part of the problem. The concept of bubbles is so new that basic things like definitions aren't agreed upon. Since there's no objective definition of what a bubble is, anyone can personally anoint anything they want as a bubble and make a convincing argument that they're right.

Shiller, who recently won the Nobel Prize for his research on bubbles, took this problem into his own hands. "It wasn't carefully defined, so I wrote my own definition in the second edition of my book, Irrational Exuberance," he recently told NPR.

A bubble is "like a mental illness," Shiller said. "The American Psychiatric Association's diagnostic and statistical manual, which defines mental illness, consists of a checklist of symptoms." For Shiller, the checklist symptoms of a financial bubble are:

  • A time of rapidly increasing prices.
  • People tell each other stories that purport to justify the reasons for the bubble.
  • People tell each other stories about how much money they're making.
  • People feel envy and regret that they didn't participate.
  • The news media are involved.

Seems simple enough.

But just as people complain that mental illness is often overdiagnosed, many financial markets could fit this checklist without being a bubble.

Take Microsoft stock in the early 1990s, when shares traded at a split-adjusted $0.89 per share.

A time of rapidly increasing prices? Check. Shares increased eightfold from 1985 to 1990.

Stories to justify the reason for the bubble? Check. "Superchips Herald a Revolution," The New York Times wrote in 1984.

Stories about how much they're making? Check. Fortune magazine ran a story in 1986 with the headline, "THE DEAL THAT MADE BILL GATES $350,000,000."

Envy for not participating? Check. One in five Microsoft employees was a millionaire in 1992, "many under the age of 30," one news article pointed out. You can imagine how that made new employees feel.

The media involved? Check. The personal computer was TIME magazine's Person of the Year in 1982.

It fit all of Shiller's bubble criteria. But Microsoft stock in the early 1990s wasn't a bubble. It was, in hindsight, still an amazing bargain. Anyone who bought Microsoft stock in 1990 has since earned a 4,900% return, versus the S&P 500's 730% gain. What looked like a textbook bubble was literally the opposite of a bubble.

Think about Amazon in 1998, Google in 2004, Netflix in 2005, Apple in 2007, hybrid cars a decade ago, or the automobile 100 years ago. The list of things we once erroneously thought were bubbles dwarfs the list of actual bubbles. By tenfold, at least.

Everyone knows bubbles exist. We know tech stocks in 2000 and housing in 2006 were utter swamps of irrationality.

But that's hindsight. And hindsight can be a jerk. We dupe ourselves with stories about how everything was obvious. I promise you, nine out of 10 people who say the housing bubble was obvious would have given you a different answer in 2006. I'm one of them. The bubble seems so obvious to me today. But I remember telling a friend in 2006 that prices would probably just flatline for a few years, not crash.

Eugene Fama, a University of Chicago economist who shared the Nobel Prize with Shiller, says he knows why this is. He doesn't think bubbles can be predicted at all. And since they can't be predicted, he doesn't think we can say they exist.

"The word 'bubble' drives me nuts, frankly," Fama told NPR last week. He thinks markets are efficient at pricing in all available information, even if in hindsight we know that information was wrong. Markets crash when people receive new information, like, say, housing sales coming in far below expectations.

"If I can predict that housing prices will go down, if the market is working properly, then they should go down now," Fama said. "Because what you're saying is, 'I have information that prices will go down,' and that information is not in the prices. But if the market is working properly, the information should be in prices."

Sure. But do markets work properly? On a chalkboard, yes. In reality, of course not. In textbooks, the average consumer spends her day calmly calculating ways to maximize her odds of success. In reality we're tricked by marketing, terrible at math, fooled by randomness, plagued by bad policy, blind to history, and drunk on courage.

Asked, "How many millions are in a trillion?" 79% of Americans either answered wrong or didn't know. Yet the majority of them will calmly tell you a $14 trillion national debt is a major threat to the economy. How can they possibly know if they don't know what a trillion is? Even when they're logical, a lot of our economic decisions are driven by emotions rather than facts. And since emotions eat facts for breakfast, we have bubbles.

NPR asked Fama, in a "come onnn" tone, if he really believed bubbles can't exist.

"You just used the keyword: believe," he said. "I don't believe. I'm an empiricist."

"I don't think there's anything in the statistical evidence that says anyone can reliably predict when prices go down," Fama said. "So if you interpret the world 'bubble' to mean, 'I can predict when prices are going to go down,' you can't do it."

Shiller rebuts that calling something a bubble doesn't mean you know when it's going to burst, just that it will eventually. "You can have a fairly high degree of confidence," he said. "That's what I felt in the stock market in the late 1990s. And then again I felt that in the 2000s, with the housing bubble." Anyone familiar with Shiller's work knows he doesn't call timing. He'll be the first to admit predicting what markets will do next is impossible.

Fama is still skeptical. "What happens each time [a bubble bursts] is the media goes in and finds someone who predicted it, and that person gets anointed," he said. "You don't go back and look at past predictions and see if it's just luck."

But doesn't Shiller calling the last two bubbles prove they can be predicted? "Statistical reliability means more than two, really," Fama said, with a hint of sarcasm. "Predicting the next 10 would be really convincing. Then I'd be convinced."

Shiller laughed. "Yeah, but I don't live that long."

That's exactly the problem. Economics isn't like chemistry, where we can conduct controlled experiments all day in a lab, thousands of times if we need to, in order to prove something exists. So few actual bubbles have occurred that we don't have enough data to be 100% sure of much of anything. By the time we have enough data to prove a concept, the economist who came up with the original idea is often dead, misquoted, or forgotten. We're left dealing with theories, often shaped by political and philosophical beliefs. 

I see two problems with the bubble debate. 

One is that even if a bubble is spotted, it's hard to know what to do about it. It's sort of like a dog chasing a deer, who then finally catches up to the deer and has no idea how to respond. Bite? Run? Bark? He didn't think he'd ever get this far. Most bubble spotters aren't content just avoiding them, and they try to bet against them. But that can be more dangerous than falling for them. A lot of smart people lost fortunes shorting tech stocks in the 1990s. Even if someone is smart enough to spot an actual bubble, their advice on what to do about it can be disastrous

Two, real-time economic data is often substantially revised. Data might tell you something looks bubbly (or not) one day, but give you a completely different picture the next, once numbers are revised. This is also true for company financial reports and academic studies. Anyone following the economy has to have an open and flexible mind. But those who are sure something is (or isn't) a bubble tend to have the opposite. They make up their mind, dig in their heels, and treat arguments against their original diagnosis as a my-side-versus-yours battle. As Andy Rooney put it, "People will generally accept facts as truth only if the facts agree with what they already believe." 

If the history of bubbles teaches us anything, it's to be humble. Many gasped at Shiller and Fama sharing the Noble Prize, since the two hold what look like opposite beliefs. But the two economists have a common denominator: They both advocate humility. Fama doesn't think we can predict bubbles. Shiller thinks we can, but doesn't think we can ever know when they'll collapse. What we need, but I know we'll never get, is more of this type of thinking. I'm holding out for a humility bubble. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

No Pitch


Read/Post Comments (54) | Recommend This Article (84)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2013, at 3:30 PM, dsalhany73 wrote:

    ... you forgot about the QE bubble

    or is that in the same category as debt bubble.

    I lost count.

  • Report this Comment On December 06, 2013, at 4:08 PM, TheDumbMoney wrote:

    "[E]ven if a bubble is spotted, it's hard to know what to do about it."

    Here is my suggestion. If you think it's a bubble and lack comfort, just ignore any greed impulse and stay clear. Go to the beach. A perceived bubble is like a potentially rabid dog that looks really cute. But don't short it either. Shorting is not a game for mom-and-pop people to play, nor even for most professionals to play.

    My wife and I moved to California in 2005 and had about $50K in cash savings, excluding 401ks. We looked at $500K condos in the Valley in Summer 2006. That was about the bare minimum you could pay at the time for a condo or house in a decent neighborhood in the "inner" LA area. I wish I could say I knew it was all a bubble and that was why I did not pull the trigger, but that is not true. The whole thing, the brokers excitedly telling me I could get the place for zero down (80/20 first and second loans, baby!) just generally skeeved my wife and I out. It didn't feel COMFORTABLE. I had absolutely no idea whether prices would go up 50% more, or dive 50%, or flatline. I am not even sure the thought really crossed my mind as to what the price of homes would do in the future. And I am serious about that. It was just about a lack of comfort and understanding with the whole process and everything that went into it. I think it comes down to that. Does it feel comfortable? If the idea of buying any asset makes you deeply uncomfortable (usually because you don't understand it or its pricing at all, as I didn't with house prices in 2006 in California), but you feel like you "have to do it," just don't friggin' buy it. Take a cold shower. To put it another way, anything that seems too good to be true is. That's about all 99% of people will ever need. Trust your gut and avoid the cute dogs if there is any substantial reason to think they might be rabid.

    With regard to AMZN in 1998, there are plenty of cute dogs out there. No need to mess with ones that are potentially rabid. It has been possible to make tons of money since 1998 without ever buying AMZN, and the vast, vast majority of people who bought AMZN also bought tons of rabid dogs and eviscerated their AMZN gains. I want none of it, any of it.

    This philosophy will never make you a billionaire, but it will never make you a pauper. Personally, I am fine with that.

  • Report this Comment On December 06, 2013, at 4:16 PM, TheDumbMoney wrote:

    To revise that comment a bit: I don't really think you need to be in the business of spotting bubbles, per se. It is enough that something feels hinky and you just don't get it. This also worked for me with gold in 2010, as a long record of posts on this website indicates. I didn't get it. I read a ton of posts by Christopher Barker and listened to his explanations and read a bunch of stuff on other sites, and I still didn't get it. So I never touched the stuff. By that time I was familiar with the lexicon of bubbles, but it was not that it was a bubble that kept me away, it was that there was a lot of smoke. It was a potentially rabid dog.

    It is the same thing keeping me away from Bitcoin now. I have no clue if that's a bubble. Who cares? I just don't get it. Maybe I really am dumb, I don't know, but I don't get it, so I am not buying. Vast fortunes may be made on Bitcoin, and I will not make one, but I don't care. I am not in the business of generating a vast fortune. I am in the business of making absolutely sure I do not suffer a permanent impairment of capital.

  • Report this Comment On December 06, 2013, at 4:29 PM, TheDumbMoney wrote:

    One more point I guess. All it takes is a day. If a person with average intelligence and research skills can't figure out in a day what basically drives the value of any given asset, he/she should just ignore it. No final determination of whether it is a bubble or not is necessary.

    Nice piece, Morgan.

  • Report this Comment On December 07, 2013, at 10:04 AM, ayaghsizian wrote:

    I agree with thedumbmoney.

    I'm OK missing out on a few Microsofts and Amazons

  • Report this Comment On December 07, 2013, at 10:52 AM, Ravenor wrote:

    "...emotions eat facts for breakfast..."

    Morgan, you should put that on a t-shirt. TM it!

    "In reality we're tricked by marketing, terrible at math, fooled by randomness, plagued by bad policy, blind to history, and drunk on courage."

    I'm adding this to my overall investing thesis as a warning to examine things a little more thoroughly and rationally.

  • Report this Comment On December 07, 2013, at 8:23 PM, boogerface02211 wrote:

    Darn fine article.

  • Report this Comment On December 08, 2013, at 5:55 AM, GrCelt wrote:

    Really? Who is Didier Sornette? Why did he write a book called "Why Stock Markets Crash"?

    Seems standard economists cannot answer many questions and this is one more. Makes me wonder about standard economists, not about bubbles.

  • Report this Comment On December 08, 2013, at 9:03 AM, MadCapitalist wrote:

    It's no coincidence that we are experiencing more bubbles since pretty much the whole world went off the gold standard in 1971.

  • Report this Comment On December 08, 2013, at 11:05 AM, TMFGortok wrote:

    Von Mises talks about bubbles in his book "Human Action". He does not use the word bubble, but he explains the phenomenom of rising asset prices due to artificially low interest rates and its effects, both positive and negative. Technically speaking, the word 'bubble' as it relates to economic conditions may not have existed before 1990 (though I would be surprised if that were the case), the idea behind a bubble has been in publication for decades (Keynesianism views it as just something that 'happens' as a 'normal' part of the business cycle; even if Keynes himself never used the word bubble, the idea has been there.

    Anyone who tries to time when the inevitable 'popping' of the bubble occurs is 99 times out of 100 going to be wrong; but that's different than recognizing that there are economic policies that do cause asset price inflation, and it's really hard to tell which asset will go through this until it actually happens. Representative Ron Paul gave a speech on the House Floor in the year 2000 about the housing policies and economic actions taken by the FED and how they would result essentially what ended up happening -- but that doesn't mean he knew a precise time.

    Your advice, regardless of economic viewpoint, is sound, and while we may disagree on the economics, I find myself agreeing with your resulting advice almost every time I read your articles.

  • Report this Comment On December 09, 2013, at 1:13 PM, JMSJMSJMSJMS wrote:

    Maybe parsing hairs, but I feel it's more accuracte to say it's difficult to "identify" bubbles, not to "predict" them. You can attempt to predict when the bubble will pop, as you noted. But first you must acknowledge that a bubble exists - you must identify it.

    So, the Bubble-Pop Tango goes like this:

    1) Accurately identify a bubble;

    2) Accurately time the popping of the bubble;

    3) Accurately identify the investments that will prosper from this popping;

    4) Accurately time the reflating of the bubble;

    5) Accurately idenfity the investments that will prosper from this reflating;

    6) Repeat as often as necessary.

    See, market timing is just that simple!

  • Report this Comment On December 09, 2013, at 5:20 PM, jwbltn wrote:

    "In reality we're tricked by marketing, terrible at math, fooled by randomness, plagued by bad policy, blind to history, and drunk on courage."

    This is a great line.

  • Report this Comment On December 09, 2013, at 5:39 PM, zumamike wrote:

    Dear Morgan House;

    Really? The word bubble was not used before the 90's? Which 90's would that be 1990? 1890? 1790? What about the well known South Sea Bubble in 1711, I believe.

    http://en.wikipedia.org/wiki/South_Sea_Company

  • Report this Comment On December 09, 2013, at 5:45 PM, Mathman6577 wrote:

    Tulip bubble in Holland in 1637.

  • Report this Comment On December 09, 2013, at 5:46 PM, AnsgarJohn wrote:

    It is indeed. Morgan Housel quotes.

  • Report this Comment On December 09, 2013, at 5:47 PM, AnsgarJohn wrote:

    In reality we're tricked by marketing, terrible at math, fooled by randomness, plagued by bad policy, blind to history, and drunk on courage.

  • Report this Comment On December 09, 2013, at 5:47 PM, PeakOilBill wrote:

    Check out the graph of total debt in the Investment Outlook article 'Credit Supernova!' by Bill Gross of PIMCO.

    Guess what will happen to the banks if something goes wrong with that level of debt.

  • Report this Comment On December 09, 2013, at 5:48 PM, xetn wrote:

    TMFGortok:

    In Murry N. Rothbard's America's Great Depression, he makes a very strong case that the 1929 market crash was caused by the Fed increasing the money supply by some 70% during the period 1920s, much of the new money going to stock speculation. The crash (he contended) was due to the Fed shutting off the spigot.

  • Report this Comment On December 09, 2013, at 5:51 PM, hembreeder wrote:

    So, what you're saying is, we have a bubble bubble, to put it a little more succinctly.

  • Report this Comment On December 09, 2013, at 5:53 PM, TMFHousel wrote:

    ^ Yes, but so many others have said that that it's more like a bubble bubble bubble. I just tried to avoid it.

  • Report this Comment On December 09, 2013, at 5:55 PM, scottsicle wrote:

    It's a good, thought-provoking article. But one point needs clarification. Shiller's work predicts when the broad market is over-valued. His approach does not - as the article seems to suggest - focus on individual stocks. It is entirely possible to have a few superstocks like Microsoft in the 90's, without the broad market being overvalued. When Shiller expresses concern that a bubble may be developing, he's not looking at the P/E of Netflix, for example. He's saying the value of the whole market, compared to historical norms, is very high.

  • Report this Comment On December 09, 2013, at 5:56 PM, lovesdos wrote:

    bubbles are not new and the fact that the word was not in econ texts is a sad commentary on econ texts. when Columbus discovered America the Spaniards imported so much silver from the new world that is caused an inflation in Europe that ended up as a classic bubble

  • Report this Comment On December 09, 2013, at 5:56 PM, TMFHousel wrote:

    <<His approach does not - as the article seems to suggest - focus on individual stocks.>>

    Where does it suggest that?

  • Report this Comment On December 09, 2013, at 5:56 PM, TMFHousel wrote:

    Ah, well, in the MSFT example. Fair point.

  • Report this Comment On December 09, 2013, at 6:00 PM, dkinseycfp wrote:

    Another great article, Morgan!

    My takeaway is that if a person is truly an investor, and treats his or her portfolio like a business, keeps it diversified by industry, size, sector, etc., and keeps an eye on the fundamentals, that INVESTOR doesn't need to worry too much about bubbles. If anyone truly kept Microsoft that long, they believed they were business OWNERS.

    Don't forget that, when you buy stocks, you are a business owner.

    Too many people today have been educated over the last 30 years that:

    1. You can day-trade your way to riches. There is no quick way to invest your way to riches.

    2. Mutual funds that are so large that they basically are index funds are investments...they aren't. They are asset-class exposure mechanisms.

    3. Modern portfolio theory is the way to avoid risk and get market returns. Partially true, but way too much faith is put into over-diversification. Or "diworseification" as it's been called.

    Just my two cents worth.

  • Report this Comment On December 09, 2013, at 6:25 PM, AnsgarJohn wrote:

    In Holland we call it the Tulipmania not bubble. Kind regards from Amsterdam.

  • Report this Comment On December 09, 2013, at 6:25 PM, thorw wrote:

    You know there is no such thing as a Nobel Prize in Economics, right? There is a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, that's like saying I'll make a prize in honor of Joseph Pulitzer for bloggers, award it to this article, and then say you've won a Pulitzer Prize.

    It should really make you ask why it's marketed as a Nobel Prize and why such marketing is trickle down needed ...

  • Report this Comment On December 09, 2013, at 6:26 PM, cmalek wrote:

    "The word "bubble" didn't exist in economic textbooks 20 years ago"

    Because no one had the brilliant idea to call the situations "bubbles." They usually were called by their correct name.

    The suffix "-gate" did not exist before June 17, 1972. Thereafter every scandal or shady deal became some kind of a "-gate." For all their supposed language expertise, the media has very little imagination in naming events. Either that or they are very lazy. The journalists figured that if it sounded clever the first time, it is going to sound clever every time thereafter. So now we have more "bubbles" and "-gate" that we know what to do with.

  • Report this Comment On December 09, 2013, at 6:36 PM, nerd51 wrote:

    Bubble is not a new term in finance even if economists don't want to admit it.

    Alexander Hamilton used the term when warning his friends not to speculate in bonds from the First Bank of the United States (1791), reminding them of the South Sea Company Bubble (1720).

    The collapse of the South Sea Company and others led Britain to pass the Bubble Act (1720).

    The 1841 book, Extraordinary Popular Delusions and the Madness of Crowds by Scottish journalist Charles Mackay includes a section on financial bubbles. Included are the South Sea Company bubble of 1711–1720, the Mississippi Company bubble of 1719–1720, and the Dutch tulip mania of the early seventeenth century. Though historians say he greatly exaggerated the Dutch tulip mania.

    I think economists don't like the word bubble because bubbles are caused by the "Madness of Crowds" showing that markets are not always rational and their theories don't always work.

  • Report this Comment On December 09, 2013, at 7:15 PM, jc09058 wrote:

    Once again, no reflection on you Morgan, Chicken Little is alive and well, and running around about bubbles here, bubbles there, bubbles everywhere.

    It is nice to know that the press has entered into the bubble mania fad but I grown a little sick of it when the talking heads decide, once again, that it is a bubble causing all of our ills.I will be glad when the trend to use "bubble" to describe situations dies out or the authors for that matter.

    That being said, I like your point Morgan and the analogy that you provided with Microsoft that anything can be made into a "bubble". Got a nice chuckle out of it and hope that others, i.e. the press, read this article and learn from it.

  • Report this Comment On December 09, 2013, at 7:30 PM, AnotherHousel wrote:

    You can be sure when you hear them say ,"This Time it's different".

  • Report this Comment On December 09, 2013, at 8:33 PM, awallejr wrote:

    Good article. As for Bill Gross of PIMCO mentioned by a responder, I stopped listening to him years ago. All he did was scare people out of the market. Had I listened I would never have recovered my losses from 2008. The only person I started to listen to was Bernanke.

  • Report this Comment On December 09, 2013, at 9:38 PM, nerd51 wrote:

    AnotherHouse!

    I think you've hit on the definitive indicator for financial bubbles, or manias or whatever we want to call them.

  • Report this Comment On December 09, 2013, at 10:18 PM, natscientist wrote:

    So, why do they commit the fraud of calling it a science, when the hallmark of science is cold reproducibility? ....it has none that don't have corrections that recall 'celestial mechanics' pre-Galileo. Harvard was founded in 1636; it didn't teach Evolution.

  • Report this Comment On December 09, 2013, at 10:31 PM, Hanage wrote:

    Humility, awareness, recognizing another's viewpoint, having an opinion while staying detached - these are all lessons we can apply to investing and our daily lives.

    Great article, thanks.

  • Report this Comment On December 10, 2013, at 1:46 AM, Jacolim wrote:

    The article failed to mention the latest "Irrational Exuberance" in the making - Bitcoin. I am trying to

    figure out what is driving the value, and what is

    backing it. Who control the trading in light of the missing million from one operator and the sudden

    disappearance of another exchange? it is starting to

    resemble the tulip saga in the 18th century.

  • Report this Comment On December 10, 2013, at 2:52 AM, colleran wrote:

    Humility is the one thing missing for most investors. The best we can do is invest in solid companies for the long term. Even then we are going to be wrong at least half the time.

  • Report this Comment On December 10, 2013, at 3:14 AM, AnsgarJohn wrote:

    @jc09058

    Firestone's Forecasting Law:

    “Chicken Little only has to be right once."

    In other words:

    Don't lose money.

  • Report this Comment On December 10, 2013, at 3:29 AM, strelna wrote:

    This is a ridiculous article. Although central bankers appear to have difficulty identifying bubbles, and so do gamblers, there are many people who can see credit-fuelled asset inflation quite easily. In the case of the stockmarket, the reliable yardsticks are Tobin's 'Q' and Shiller's CAPE. In addition, it is not difficult to sense from everyday circumstances. Anybody who did not recognise the tech. bubble as a bubble must have had a strangely wandering mind. Or have been oblivious of valuation ratios - not that many were even possible!

    Of course you will not know when the bubble will end! So what? It is enough to have recognised the bubble.

    Practical action? Ride the bull like anything. Apply a simple rule of selling huge gainers to regain your book cost after tax so you are 'in for free'. Keep a high level of cash in reserve as insurance. Add to cash as risk rises. Know that it is a bubble and be prepared to step off. Is that difficult? No. Watch your high-multiple holdings like a hawk and despise them for what they are: chimeras. As contempt rises, apply a trailing, maybe tightening stop-loss. Never forget you will need a lot of money when the bubble ends.

    Or of course, just buy on good valuation criteria and hold hard.

  • Report this Comment On December 10, 2013, at 3:37 AM, strelna wrote:

    Incidentally, a nice bubble chart is that of the correlation of the S&P with the Fed. balance sheet and margin debt.

    I expect that correlation to continue! Up and up and away? No - up, up and - sometime, who knows when, who cares - down!

  • Report this Comment On December 10, 2013, at 3:43 AM, strelna wrote:

    Bitcoin is not a bubble, merely volatile as you would expect. It is a rational response to the debasement of currency by politicians and therefore popular and successful. Naturally it faces risk: whether it can be closed down by self-serving authorities and whether it will face competition. But that has been true of many introductions.

  • Report this Comment On December 10, 2013, at 7:01 AM, Sam101101 wrote:

    Everything that has ever gone digital has made our lives easier and given us more of that lovely commodity: Time.

    Why not money too? I don't think bitcoin is a bubble; I think it is a brilliant concept; it is putting a monetary system in the hands of the people themselves!

  • Report this Comment On December 10, 2013, at 8:22 AM, duuude1 wrote:

    And what do people make of Bitcoins, gold, tulips, dotcoms, and homes? Bubbles. Each are beautiful, amazing, wonderful, innovative.... But WE make them into bubbles.

    Something being brilliant (like internet companies) doesn't make it immune from bubbles.

  • Report this Comment On December 10, 2013, at 8:46 AM, TopAustrianFool wrote:

    "The word "bubble" didn't exist in economic textbooks 20 years ago, according to Yale economist Robert Shiller. How can something we didn't talk about before the mid-1990s suddenly infect every inch of the global economy?"

    Wow! The word "Malinvestment" has existed since John Stuart Mill in the 1860's and Ludwig Von Mises re-introduced it in the 1930's.

    Only Austrian economics predict the sources of "Bubbles" accurately. These occur once central banks allow interest rates to float more naturally after a period of artificially low interest rates produce misallocation of capital.

    Please, read more. Get out of your comfort zone.

  • Report this Comment On December 10, 2013, at 11:15 AM, Gorm wrote:

    Simple logic tells me we can't SPEND ourselves into prosperity, either with our Fed via monetary policy at $1T a year or government via fiscal policy that has amassed $17T in DEBT and trillions more in underfunded liabilities.

    Eventually, that DEBT must be paid, inflated away or defaulted upon. Keep in mind all currencies are fiat, purely based on faith and confidence of its holders.

    Reality is we are NOT solving our core problems, just buying more time, hoping for some sustainable recovery.

    The Illusion (bubble) will persist UNTIL the majority accept the reality that cannot end well!!

  • Report this Comment On December 10, 2013, at 12:58 PM, pancratski wrote:

    If economic text books didn't mention Tulip Mania 20 years ago, it's another black mark for the education system. I think we have a bubble on bubble talk in the media.

  • Report this Comment On December 10, 2013, at 1:00 PM, pancratski wrote:

    PS I sold my commercial real estate in 2006.

  • Report this Comment On December 10, 2013, at 1:04 PM, Mathman6577 wrote:

    The book "A Random Walk Down Wall Street" mentioned the Tulip Mania of 1637.

  • Report this Comment On December 10, 2013, at 4:10 PM, hbofbyu wrote:

    I read many articles - even here on The Fool - back in 1998- 2001 that quoted Warren Buffet on how he was not buying any tech stocks because he could not understand how they were being valued. Everyone thought he was too old school to understand. I would think that he came pretty close to accurately identifying a bubble - even if indirectly.

  • Report this Comment On December 10, 2013, at 4:43 PM, truman1987 wrote:

    I think another definition of a bubble is that people are not buying the item to use or for it's intrinsic value but are speculating. In the housing bubble, the end was near when 30% of the buyers of houses never intended to move in, but "flip" it before the first mortgage payment was due.

    The first Microsoft owners were true investors who were also investing their careers to make it successful. Even if it had failed I wouldn't call it a bubble.

  • Report this Comment On December 12, 2013, at 12:39 PM, SkepikI wrote:

    <Why not money too? I don't think bitcoin is a bubble; I think it is a brilliant concept; it is putting a monetary system in the hands of the people themselves!>

    What a great new concept...oh wait, counterfeiting has been there for years before ;-)

  • Report this Comment On December 13, 2013, at 6:01 PM, captainccs wrote:

    The punditry is having a bubble bubble, that's all.

  • Report this Comment On December 16, 2013, at 1:39 PM, Peak2Trough wrote:

    Morgan,

    If you're going to link to your Hussman article as a means to prove the point of this article, it would probably serve to prove that the data in that article is accurate. Your graph and resulting data in that article, unfortunately, are not congruent with Dr. Hussman's statements and graphs from their website as I pointed out the comments.

    And Schiller isn't "predicting bubbles" per se, he's predicting reversion to a mean. There exists lots of empirical data on that point, and had they asked Fama that question, perhaps his and Schiller's opinions would have been in closer alignment.

    P2T

  • Report this Comment On December 16, 2013, at 2:24 PM, drcmoore wrote:

    A couple of you guys mentioned some Austrian economists whose work can inform us about bubbles, given their tradition of studying business cycles. For example, there are several articles in the Quarterly Journal of Austrian Economics, such as:

    Salerno, Joseph T. "A Reformulation Of Austrian Business Cycle Theory In Light Of The Financial Crisis." Quarterly Journal Of Austrian Economics 15.1 (2012): 3-44. Business Source Complete. Web. 16 Dec. 2013.

    Zimmermann, Guido. "Austrian Monetary Policy Views: A Short Critique." Quarterly Journal Of Austrian Economics 6.4 (2003): 77-80. Business Source Complete. Web. 16 Dec. 2013.

    Callahan, Gene, and Roger W. Garrison. "Does Austrian Business Cycle Theory Help Explain The Dot-Com Boom And Bust?." Quarterly Journal Of Austrian Economics 6.2 (2003): 67. Business Source Complete. Web. 16 Dec. 2013.

    Mueller, Antony P. "Financial Cycles, Business Activity, And The Stock Market." Quarterly Journal Of Austrian Economics 4.1 (2001): 3. Business Source Complete. Web. 16 Dec. 2013.

    Cochran, John P. "Hayek And The 21St Century Boom-Bust And Recession-Recovery." Quarterly Journal Of Austrian Economics 14.3 (2011): 263-287. Business Source Complete. Web. 16 Dec. 2013.

    THORNTON, MARK. "Hoover, Bush, And Great Depressions." Quarterly Journal Of Austrian Economics 13.3 (2010): 86-100. Business Source Complete. Web. 16 Dec. 2013.

    HOFFMANN, ANDREAS, and GUNTHER SCHNABL. "Monetary Nationalism And And International Economic Instability." Quarterly Journal Of Austrian Economics 16.2 (2013): 135-164. Business Source Complete. Web. 16 Dec. 2013.

    FISHER, ELOY A. "Monetary Policy And Capital-Based Macroeconomics: An Empirical Examination For The United States (1963-2012)." Quarterly Journal Of Austrian Economics 16.1 (2013): 45-73. Business Source Complete. Web. 16 Dec. 2013.

    Calandro Jr., Joseph. "Reflexivity, Business Cycles, And The New Economy." Quarterly Journal Of Austrian Economics 7.3 (2004): 45-69. Business Source Complete. Web. 16 Dec. 2013.

    Anderson, William L. "Say's Law And The Austrian Theory Of The Business Cycle." Quarterly Journal Of Austrian Economics 12.2 (2009): 47-59. Business Source Complete. Web. 16 Dec. 2013.

    THORNTON, MARK. "Skyscrapers And Business Cycles." Quarterly Journal Of Austrian Economics 8.1 (2005): 51-74. Business Source Complete. Web. 16 Dec. 2013.

    MILLER, ROBERT C. B. "Systemic Appraisal Optimism And Austrian Business Cycle Theory." Quarterly Journal Of Austrian Economics 15.4 (2012): 432-442. Business Source Complete. Web. 16 Dec. 2013.

    REYNOLDS, MORGAN O. "The Poverty Of Modern Macroeconomic Theory And Power Of Austrian Business Cycle Theory." Quarterly Journal Of Austrian Economics 13.3 (2010): 11-41. Business Source Complete. Web. 16 Dec. 2013.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2755631, ~/Articles/ArticleHandler.aspx, 10/24/2014 8:04:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement