If you read any decent history of speculative manias (“bubbles,” as it were), you’ll discover that belabored efforts to develop frameworks or metrics for assessing the level of “froth” in a given market are, at best, superfluous — analysis for the sake of it.
There are obvious parallels between almost all such historical episodes and while it’s nice to have a “guide” while reliving them, factual accounts interspersed with anecdotes and contemporaneous media clippings (where available) more than suffice.
“Boom And Bust,” by William Quinn and John Turner, is a good example. It’s reasonably enjoyable and it’s a quick read, but the paradox is that Quinn and Turner set about developing a framework for bubbles when their straightforward, relatively short account of a dozen booms (and subsequent busts) makes it abundantly clear that no such framework is really necessary. Rather, common sense is all that’s needed to identify speculative excess.
Their account also underscores why common sense is almost never sufficient to prevent bubbles from forming. One problem is that “common sense ain’t so common,” as the saying goes. But there’s also greed and its cousin, fraud. And the presence of market participants who believe (sometimes correctly) that they can successfully play the “greater fool” game, buying high comforted in the notion that they can sell to someone else at an even loftier price.
When it comes to discouraging people from participating — you can’t. Because, together, those dynamics are more than enough to override the “it’s as plain as the nose on your face” character of most manias.
Myriad other factors play a role, including misguided assumptions about the ease of exploiting genuinely promising opportunities, loose monetary policy, enthusiasts who wholeheartedly believe in whatever the pitch happens to be and, of course, the notion that new technology has obviated “old” valuation models.
But in the end, all you need is an excitable public, greed, the “greater fool” psychology and a dash of fraud (or something like fraud), and boom! — you’ve got a boom. (See what I did there?)
I doubt Quinn and Turner set out to drive home the futility of trying to predict and analyze bubbles. In fact, they set about doing exactly the opposite. But if you spend the three days it would take you to read the book (it’s not even 300 pages long), you’ll likely come away will little more than a reinforced belief in the susceptibility of humans to well-known temptations.
That, to me anyway, raises questions about what it is we’re really saying when we declare that this or that asset class (or, in the current conjuncture, virtually all asset classes) are in a “bubble.”
The figure (above) appears to show a mania. But so what? Do you ever ask yourself that? So what? Is this really news?
One reason we should care is that when manias end, the fallout can have devastating side effects for what we now call “Main Street.” That’s the best reason to care. But that’s hardly a universal consequence. Sometimes, “regular” people are scarcely affected at all.
One thing’s for sure, it’s a relative rarity that anyone shouting from the rooftops in the midst of euphoric speculation actually cares about the proverbial Everyman. Usually, the detractors are themselves speculators, and sometimes they make money on the way up and on the way down.
Incidentally (or not), Jeremy Grantham reiterated his imminent collapse warning again this week. “My guess is in the next few months the termites will get to the rest of the market,” he said, during a conference in Sydney. In this case, the “termites” were corners of the market which have already experienced large declines.
“The market is at an all-time high, optimism is at an absolute peak,” Grantham went on to say. “We’ve turned the pressure up and up, more money, more moral hazard so here we are at the peak.”
He states that (the “peak” bit) as though it’s a fact. It’s not. It can’t be. “Optimism” isn’t a thing that one can gauge objectively. It’s a feeling. An experience. That’s part of what makes a mania.
And even if Grantham is right (which he will be, eventually), it won’t matter. There’ll be another mania after this one and another one after that one, and so on, until humans are extinct.
You can’t “prevent” bubbles anymore than you can prevent a dog from peeing on a tree or a child from reaching for those abominable blue gummy sharks hanging like forbidden fruit in the checkout line at the grocery store.
You can’t prevent it by forcing monetary authorities to be more responsible either, or by trying to regulate away other accelerants, some of which are unwitting accomplices.
Take the media, for example. Do journalists (of the honest variety) help or hurt? “Despite its skeptical editorial line, developments in the cycle share market were usually reported without comment,” Quinn and Turner wrote, in a chapter on the British Bicycle Mania.
Their point was simple: Even when a news outlet strives to be the voice of reason, voluminous reporting draws attention to the unfolding mania. Merely reporting the facts (e.g., daily moves in share prices) becomes an aggravating factor.
“As the trade in cycle shares grew more popular, the Financial Times steadily increased its coverage, devoting a daily section to the cycle share market,” Quinn and Turner went on to remark, adding that, “the resulting publicity probably had a more significant effect on the market than the newspaper’s sporadic criticism.”
Does that sound familiar? Think about how much coverage Bloomberg dedicated this year (and last) to the “meme” stock mania, critical or otherwise. If you don’t think that’s been an accelerant, you don’t know much about history.
A few days ago, I was at the supermarket and I caught a glimpse of my pharmacist heading down the candy aisle. She’s a cheerful spirit and we chat idly about this or that when I pick up a prescription. I went down the adjacent aisle, took a quick left and headed back up the candy aisle to intercept her for a joke. “You’re supposed to set an example, and here you are buying Haribo sour bears.” It took her a half-second — it was the first time we’d seen each other without masks in a year. “I had fries at lunch, so the day was already shot,” she sighed. “Well, at least you’re not getting the blue sharks.” “I love the blue sharks,” she conceded.
11 years ago, a girlfriend of mine had a large dog. One day, after a long walk, he peed on the backseat of the car. When we got home and she discovered it, she asked him why he did it. “Don’t ask him that.” She asked him again, pointing at the wet spot on the seat. I got annoyed. “Determining a motive is likely to be difficult here,” I reminded her. “He’s a dog, after all, and even if there was a motive, he’ll be characteristically tight-lipped about it.”