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I'm aware of three indicators of bubbles: 1. Pricing anomalies where the price of two assets that have fundamental relation to each other violate that relation
by shuckles 7y ago
I'm aware of three indicators of bubbles:
1. Pricing anomalies where the price of two assets that have fundamental relation to each other violate that relation. For example, in the 1999 bubble, 3Com was a majority owner of Palm, but their market caps were inverted for almost two months.
2. Huge upward movements in price without any corresponding changes in fundamentals. NASDAQ doubled in 2000 without commensurate good news in the prospect of telecom and internet companies. Similar was Bitcoin's tenfolding, or whatever, in 2018.
3. Huge downward movements in price without fundamental news. Again, NASDAQ decreased by 3/4 of its value in a year and a half even though there was only a short recession, rates were low, and economic fundamentals like productivity were growing fast. Part of the reason I listed downwards movements as separate from upwards is that volatility in valuation is an important feature in and of itself.
I'm curious if anyone has indicators to add to the list or is able to apply these indicators to current events.
And as always, even if you have identified a bubble, trading profitably on this is subject to the efficient market hypothesis.
- danieltillett 7y agoThe problem is not identifying bubbles, but knowing when they are going to burst. We have a massive real estate bubble here in Australia, yet I have not the slightest idea when it might burst.
- Joakal 7y agoIt is bursting gradually. House prices are dropping. Unemployment up, highest personal debt in world, high utility prices, etc. Unlike USA, Australians can't suddenly drop their debt for properties. Maybe under Labor you would get your burst bubble.
- danieltillett 7y agoYes but with governments playing with things like margin requirements, tax policies or income verification it is a moving target. House prices here are unsustainable in the long term, but prices can stay unsustainable for longer than you can stay solvent betting on crash.
- shuckles 7y ago"And as always, even if you have identified a bubble, trading profitably on this is subject to the efficient market hypothesis." Timing is hard in the short run, certainly. However, if you believe you have identified a true bubble, it seems wise to scrutinize long term commitments requiring outsized returns from the underlying asset? Practically, this would mean not tying your career to bubble technologies; not settling down into a bubble-priced home-cum-retirement nest egg; etc.
- danieltillett 7y agoYes. I own a very overprice home, but I have avoided joining the masses and becoming a part-time landlord (the great Australian dream it seems).
- dmos62 7y agoThere are analysis strategies oriented around identifying and trading reversals based purely on price movement. For understandable reasons it's often regarded as forest medicine by fundamental traders, but there's a bunch of people using it everyday profitably. It is more art than science though.
- fuckyah 7y agoCurrently the SP500 is around 11% overvalued, on the log chart from 1970 - which is pretty decent, considering there were much much higher levels (100%+). https://imgur.com/a/fykBcNa https://imgur.com/a/fykBcNa Also check out this: https://www.leggmason.com/en-us/advisor-resources/main/us-economy-anatomy-of-a-recession.html https://www.leggmason.com/en-us/advisor-resources/main/us-ec...