Tuesday, April 8, 2014

Another bubble on the horizon?

Check out this quick article from the WSJ arguing against those who would say that we're facing a new bubble today:

5 warning signs of a stock market bubble http://on.mktw.net/1lHFbUi

What do you think? He has pretty compelling numbers in favor of his argument....

3 comments:

  1. I now understand a bubble as market players' unrealistic expectations or overoptimism about the value of a product, asset, or service. So could I say that anytime when a tremendous increase in market pricing or in ROI takes place, there is a high chance that a bubble is hidden around the corner?

    In the US, the most famous bubbles took place in the modern era. (In Europe, the Tulip mania occurred way in the 1600) Perhaps some characteristics of our today's US market may help explain this phenomenon.

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  2. Also, great job on today's presentation Sanjay and Rasheed :)

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  3. I think we may have a bubble in the market of people talking about a bubble. With that said, I think it's really hard to tell if there is a bubble or not. Even Ben Bernanke said of the housing market before the crash, "House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals." This quote was also in our reading and when I read it, I didn't know whether to laugh or cry.

    I think bubbles are hard to detect because it's so perception driven. The perception that asset prices will go up is also a property of the thing you are perceiving. This allows the self-fulfilling prophecy of bubbles to go on for a while, but when you realize it's a bubble it's often too late because you already think that it's a bubble. It's just like in quantum physics, where the very act of observing a particle alters its wave-function, to give a wonkish example.

    After the work that people like Robert Shiller have done about how sentiment can drive markets, I think looking at the psychology of market participants may be a much better way to find out if something is a bubble. Obviously, this is very difficult.

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