Are We Really Past A Bubble Economy?

Suppose the real estate bubble didn’t really end, it just went into hibernation, or that the current stock market splurge is just a continuation of the dot-com phenomenon. I can hear you already saying, “Not a chance, we learned our lessons.” Well Robert Shiller has a few words of caution about the end of bubbles.

It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

This is what happened in the bull market of the 1920’s in the US, with the peak in 1929. We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a sudden turning point and a major and definitive crash. In fact, a major boom in real stock prices in the US after “Black Tuesday” brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash.

Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

Sort of makes you sit back and think about those soaring home prices or a S&P at historic levels. Note that both are occurring when some fairly significant fundamentals say it shouldn’t be happening. Home prices in many areas have gone up dramatically despite tight credit, strapped first time buyers and trapped existing owners. Stock prices have continued to march upwards though profits have of late been mediocre at best. There are lots of rationales offered for both movements but sometimes they sound like … well, just rationales. When I hear people reaching for justifications I think it’s time to maybe look around and proceed a bit more cautiously.

Frankly, I don’t think we’re in any bubbles right now. Gold is probably the only one that was kicking around and it has certainly been deflated. At the same time if prices of some assets continue on the same path without a commensurate change in underlying fundamentals then it might be time to revisit Shiller’s ideas.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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