Two very interesting posts and discussions from Naked Capitalism. Commenting on Jeremy Grantham’s FT interview about bubbles:
“Bubbles are important for the country because there is nothing more dangerous and damaging to an economy than a great asset bubble that breaks. And this is something the Fed never seems to get. … We looked back as far as we could, [of the 34 bubbles we found over the years], 32 have moved all the way back down to the trend line that existed prior to the bubble forming. There were no exceptions. The two that are outstanding, the UK and Australian housing bubbles, form a unique and interesting subset caused by, I believe, floating rate mortgages.
My informal working definition for a bubble is a price rise that is at least two standard deviations above trend. My assumption is that prices never follow a random walk. Rather prices are influenced little enough by past price movements below two standard deviations that a Gaussian bell curve is a good approximation of price data.”
Richard Kline adds in the discussion,
“the 2 standard deviation measure is a good heuristic. Once can look at many trend deflections and readily spot the troubled ones: it _is_ that simple. This is why some of us saw that tech stocks a dozen years back or housing five years back were seriously in bubble territory. And why Alan Greenspan’s comments that ‘who could tell if one was underway’ were risible at the time. Bubble’s aren’t subtle things, they are jarring divergences.” (1)
and this week:
“A correspondent e-mailed me about his belief that credit market valuations are more than a big dubious. For instance, subordinated tranches of commercial real estate bonds, which at the lows of last year were trading at 30 cents on the dollar are now at 90 cents. He thinks (and this is a space he knows) that a lot of it will go to 5 cents on the dollar.
This is an extreme example of liquidity-charged valuations versus projected future fundamentals, aka the greater fool school of investing” (2)
Tim Kastelle recently noted
“Bubbles are useful precisely because we can’t pick the winners in advance. The issue that Umair might take with this is that growth isn’t by definition good. I agree with this, so in as far as bubbles drive growth, then they aren’t necessarily good. But I don’t think that they are by definition bad either. Our challenge is to figure out how to drive investment in creating things that have genuine sustainable value.” (3)
Its a big challenge and we are not equipped with suitable technologies to assist us in the decision making for it. I’m not going to comment on the economic calculations of these (all of the discussion that I have found useful since September 2008 looks at valuation and risk and what we can predict and what we can’t – a must-read post and discussion on Value at Risk, at the time from Naked Capitalism ), but the visualization. Having explored financial visualization a while ago – summary, use of text – as humans we are amazing – we have adapted technologies to improve our communication with each other.
But we can only go so far though in visualizing the points from discussions on the web using computing technologies in their current state which display graphs for example (even if we understand the theory very well and become more competent with the software). Economic models are still used (and taught in economics education) with these kinds of software but how far are the limitations of the models as well as the visualization sofware – conceptually ‘understood’ by those who look at them?
And sorry augmented reality enthusiasts (another bubble in the making ?), that’s not really going to help that much either. Nor are computing giants who race away with half an idea – mass produce and generate hype (is it hype or hope or both) bubbles, which stem from their design compromises based on the ongoing economic performance of their company (and consumers who are so drowned in information and the rest these days, that anything that makes their lives a little easier seems wonderful and don’t seem to actually really care enough.)
If you can’t see it, feel it, hear it, breathe it – how are you ever going to create anything that is sustainable – if you compromise fairly quickly about how humans learn and what humans actually do in the first place.
1. Harrison E, (Kline R) (2010) Jeremy Grantham on Bubbles, Naked Capitalism blog, available at http://www.nakedcapitalism.com/2010/04/jeremy-grantham-on-bubbles.html
2.Smith Y (2010) More Proof the Bubble is Back, Naked Capitalism blog, available at http://www.nakedcapitalism.com/2010/04/more-proof-the-bubble-is-back.html
3. Kastelle T (2010), Don’t fear the social media bubble, Innovation Leadership Network, available at