Commentaries
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Identifying bubbles
One of the biggest debates about China today is whether it is at the stage of asset price inflation or has entered into a bubble. Here are some useful quotes from leading bubbleologists to help you decide:
Charles P. Kindleberger, author of Manias, Panics and Crashes: A history of financial crises, uses the term bubble to mean any deviation in the price of an asset or a security or a commodity that cannot be explained in terms of the “fundamentals”. Small price variations based on fundamentals are called “noise”.
Kindleberger and co-author Robert Aliber explain further: The bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price; the term “the greater fool” has been used to suggest the last buyer was always counting on finding someone else to whom the stock or condo apartment or the baseball cards could be sold.
In an effort to determine how bubbles form, Robert Shiller focuses on a psychological feedback loop among investors, who become ‘attracted to an investment irrationally because rising prices encourage them to expect, at some level of consciousness at least, more price increases. A feedback develops – as people become more and more attracted, there are more and more price increases. The bubble comes to an end when people no longer expect the price to increase, and so the demand falls and the market crashes.’
Gold’s run impressively up
All the goldbug fever, not withstanding today’s pullback in the yellow metal’s price, got me thinking about just how well has gold stacked up against say stocks and oil over the longer term. I picked 2004 as a starting point for no other reason than it gives enough distance from the mania of the credit bubble and the distortion of its popping.
Gold’s trajectory is pretty impressive. Now whether you think that means it’s bubble that never fully burst or whether it’s indicating a longer term trend in which enough investors want a hedge against inflation further down the line is another matter. But, since 2004, it’s been mostly up.
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The Wall
