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Well-behaved bubbles often make history
- fredfoobar 5y agoThis fits in perfectly with my "bubbles are everywhere" thesis. +1 insightful.
- ipsum2 5y agoThat sounds like confirmation bias.
- fredfoobar 5y agoIt sure does sound like it. But if you want to put some substance behind your thoughts, I recommend this book: https://www.amazon.com/Chaos-Making-Science-James-Gleick/dp/0143113453/ref=asc_df_0143113453/ https://www.amazon.com/Chaos-Making-Science-James-Gleick/dp/...
- rgifford 5y ago> Bubbles can be directly beneficial, or at least lead to positive spillover effects: The telecom bubble in the ’90s created cheap fiber, and when the world was ready for YouTube, that fiber made it more viable. Even the housing bubble had some upside: It created more housing inventory, and since the new houses were quite standardized, that made it great training data for “iBuying” algorithms — the rare case where the bubble is low-tech but the consequences are higher-tech. The housing bubble led to a short term increase in housing inventory, but it also dampened housing development (arguably forever). I'm guessing the net affect to housing supply was economically inefficient. Certainly a sign of the times when VC firms hype the positive externalities of bubbles as US companies climb to insanely high price to earnings ratios, interest rates are at record lows, and cheap money and debt abound. I have a feeling this ain't gonna age well.
- sokoloff 5y agoWhat mechanism(s) of the housing bubble dampened housing development?
- rgifford 5y agoWe have and are still struggling to get back to the same level of housing development we had around 2000 [1]. If we adjusted for housing starts per capita this would look even worse. Why? I don't know, but I'll hazard two guesses: - Financing requirements around development became much stricter after 2008. - Housing was once seen as a risk free, stable investment. 1. https://fred.stlouisfed.org/series/HOUST https://fred.stlouisfed.org/series/HOUST
- ffggvv 5y agowhen you see an asset plummet are you really going to invest in more of it? people thought it was a toxic asset and many home builders went out of business
- sokoloff 5y agoPeople still prefer to live inside. I wouldn’t expect landlords to walk away from housing the same way that owner occupants (especially zero or first-time buyers) might get uneasy.
- ffggvv 5y agonot landlords but builders will slow down or abandon new construction and prospective landlords didn’t enter the field
- paulpauper 5y ago>I have a feeling this ain't gonna age well. People have been warning of this since 2014 when Facebook bought out WhatsApp.Even 2012 when Facbeook bought out Instagram. Maybe it will end well and surpass everyone's expectations. Why don't people ever predict that?
- hemantv 5y agoBecause pessimistic sounds smart, optimists make things
- slg 5y agoWhat are examples of companies that have maintained an extremely high price to earnings ratio for decades and never crashed down to Earth? I don't ask this to sarcastically imply it doesn't happen. I generally would like examples if people have them.
- rgifford 5y agoI'm personally not sure what's gonna happen. I don't foresee US economic growth rates of the past 40 years sustained for the next 40. We kicked the can down the road in 2008, 2012, 2014, sure. Anytime the S&P500 suffers we lower interest rates, open swap lines, buy corporate debt, and now we're talking about a 10T infrastructure program. Just take a sober look at US federal spending and entitlement programs. At what point is the US itself a bubble? Burry's answer: "When the degree to which we can tax our population eclipses the interest on our debt" [1]. It's not pessimism to tell someone they're standing under a massive, precariously placed boulder. Just because you like them, just because it's inconvenient, just because it's very rare people get hit by boulders -- it doesn't make the boulder go away. The boulder is current debt levels and it's just gotten bigger over the past 10 years. 1. https://youtu.be/pDXHMbnF1nw https://youtu.be/pDXHMbnF1nw
- vmception 5y agoThere is a more timeless valuation metric that looks at asset valuations in reference to treasury yields. And it is helpful to look at treasury yields as a reference to how much money is in the system that needs to be placed. The entire incentive is to find an investment that earns money faster than the value of your money drops due to treasury & central bank activity. (The actions of issuing governments and central banks are the primary way more money gets into the economy than before, and this pushes down interest rates.) TINA - "There is no alternative" has been used over the last decade to suggest a problem: that there is no where else for investors to park money so they stretch valuations poorly. But "TINA" has always been the case, to a degree which has only been limited by geopolitics and fragmented economies in the past. Valuations have always been tied to how much money is in the system. So - yes - the capital formation and placement process is messy and there is wild short lived inefficiencies in some parts of the market such as a single collectibles market attracting too much capital or a single stock becoming a crowded trade. But across the entire asset classes bubbles might not necessarily be bubbles.
- AnimalMuppet 5y agoI think I agree with that "more timeless valuation metric". Would you mind sharing what it is saying about current conditions?
- vmception 5y agoI havent checked how close/far to the correlations we are right now, but the main point is that its not useful to use some P/E ratio* from the 1980s to decide if a particular company or sector is overvalued or not. It would basically be P/E/Money Supply instead *or revenue multiple, general valuation, etc
- dumbfoundded 5y agoTo me, this doesn't feel like a bubble so much as fiat currencies like the dollar losing lots of value. Using gold price as a reference, gold has gone from ~$300 in 2000 to ~$1850 today. As the dollar loses value, things denominated in dollars but with real value like land go up. IMO, it doesn't seem like a bubble so much as the dollar is only worth about 15% of what it was 20 years ago.
- endisneigh 5y agoWhat a strange article - how would you know if a bubble is “well behaved” before the fact?
- paulpauper 5y agoBut each time Amazon added a category, they acquired users who would spend on their existing categories, and, later, merchants who could offer newer categories. Each search tweak Google made gave them a new set of tools to monetize clicks, but also reinforced the instinct to perform lots of searches. Facebook’s marketplace is partly a way to monetize the site, but it also gives buyers and sellers one more reason to log in every day; as it turns out, one of the most addictive games ever launched on the Facebook platform is called “Affordable Exercise Equipment Quest,” and I’m a daily active user. If someone had just bought shares of these three stocks a decade ago and turned off their computer,went outside, and did nothing else, they would have beat probably 99.5% of money managers/funds. Moreover, it would not have required any special insight or skills, but rather just investing in companies that a decade ago were already very big and dominant and in the news, not trying to find a hidden gem.
- koolba 5y ago> If someone had just bought shares of these three stocks a decade ago and turned off their computer,went outside, and did nothing else, they would have beat probably 99.5% of money managers/funds. Will that be true a decade from now? For these companies to 10x again would end up with massive market caps, nearly $20T for AMZN.
- paulpauper 5y agoIf amazon, google, and facbeook become the economy, then there is still much more room for upside. We saw this with Covid in which Amazon and Walmart became major suppliers and distributors of goods and services.
- Udik 5y agoI remember Facebook's ipo. If I'm not wrong, the shares crashed for a few weeks/months right after the initial enthusiasm. It wasn't clear at all that Facebook was going to keep growing indefinitely. By the way, did you buy Coinbase shares? In ten years it could be another example of some obvious buy ("big, dominant and in the news"). Or they might have turned to junk, too.
- beckman466 5y ago> Even the housing bubble had some upside: It created more housing inventory, and since the new houses were quite standardized, that made it great training data for “iBuying” algorithms — the rare case where the bubble is low-tech but the consequences are higher-tech. Yeah who cares that people lost their homes and their mental health. Honestly, wtf is this hell I am living in?
- actusual 5y agoHe's not saying the net result of the housing bubble was positive. He's only pointing out that there was a non-zero upside despite the heavy heavy downsides. Honestly, comments like this make general discourse so much harder. At the mere mention of a controversial topic, the top commenter likens the experience to living in hell.
- paulpauper 5y agoMany lost homes they either would have never had under a regime of tighter lending standards, or never should have had. It is not like anything was stolen from them. It's like buying a crypto coin for $1k, it goes to $4k, and then falls back to $1k. Was $3k really stolen from you or was it never really yours to begin with?
- dumbfoundded 5y agoIt's a finance person trying to justify their existence. Finance people love variance (bubbles in the extreme case) because it's the only way they make money. If stocks grew 5% a year with little variance, the best strategy is just to hold, wait and cash out when you need to spend the money. But if it goes down 15% one year, then up 22% the next, there's a lot more money making opportunities. Financial analysts love bubbles. They make tons of money and if things go really bad, they get bailed out. The worst thing in the world is consistent growth without variance. It's a way to make money without actually making anything. Most people in finance will try to justify themselves through some sort of liquidity argument but the author appears to be getting more creative.
- jl2718 5y ago
- candyman 5y agoCurrency is something that isn't a store of value. Cash should be thought of as a depreciating asset like a car. We do need bubbles though - it just a way through an investment cycle in something new. In January 2009 NVDA was below $10 and the investment community certainly didn't appreciate the longer term future there. Coinbase (COIN) is a very interesting idea these days. It's not easy to see the long term but that was true for NVDA and FB at the IPO when the shares tanked to $18.
- deleted 5y ago[deleted]
- baron816 5y agoSomeone could definitely write a book on bubbles that never popped, or the bubbles that popped, but didn’t have too. Narratives drive what happen to bubbles, and I assume there have been bubbles that were captured by the wrong narrative at the wrong time.
- nitwit005 5y ago> A bubble is an objectively irrational shared belief in a better potential future … but that doesn’t just describe someone bidding up asset prices; it also describes anyone who chooses to build that kind of future. Feels like they're redefining the term to be all encompassing. Normally something like Apple investing in R&D, and deciding to make the iPhone wouldn't be an "asset bubble".
- danielmarkbruce 5y agoExactly right. "The definition of X is Y. Y is actually good because blah blah". It's terrible.
- kemitchell 5y agoHe didn't just generalize it. He heaped on positive connotation. Bad thing is good because we've defined it to be good. The only concession is that it's irrational. But flip that around, the implication is that the irrationality is good. Here is a theory that lets me feel good about undeniable mass irrationality. Speculation is speculation. Sure it's all fine and dandy…when by luck it works out okay.
- hoseja 5y ago> Bad thing is good because we've defined it to be good. That literally defines popular morality. There is no other definition of good and bad besides cultural consensus.
- 6gvONxR4sf7o 5y ago> A bubble is an objectively irrational shared belief in a better potential future … An objectively irrational bubble is generally akin to a ponzi scheme, where everyone hopes someone else is left holding the bag. Phrasing it as a bunch of people who just believe in a better future is an extreme enough euphemism I'd expect to see it in a Silicon Valley parody.
- dang 5y ago"Please don't post shallow dismissals, especially of other people's work. A good critical comment teaches us something." https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
- 6gvONxR4sf7o 5y agoI just edited it. Acceptable?
- dang 5y agoIt's certainly better but the swipe at the end seems completely gratuitous to me, and breaks the HN guideline against snark. Moreover, you're still breaking this site guideline: "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize." The author is not saying anything as stupid as "it's a bunch of people who just believe in a better future", and reducing other people's statements to stupid statements is a trope of poor internet comments.
- danielmarkbruce 5y agoActually, the author is doing something very close to that.They have redefined a reasonably well-defined term in a disingenuous way and then taken that as a given for the rest of the article. You can see several people point this out. This very thing - redefining terms to fit an agenda or argument - is often used in political arguments. It's destructive.
- dang 5y agoFun and perhaps marginally relevant fact: the author posted the following in what I believe was the first cryptocurrency thread on HN: https://news.ycombinator.com/item?id=253999 https://news.ycombinator.com/item?id=253999 That was 3 months before the Bitcoin paper was published. I wonder how many years went by before a second HN comment even mentioned the energy critique of Bitcoin mining.
- coolspot 5y agoYep, looks like you found Satoshi’s HN account - blastomere. Things they talk about - energy consumption, crypto puzzles, similarity to gold, etc. In 2008! It is either Satoshi or someone very close - Hal Finney, Nick Szabo, Wei Dai, Dave Kleiman, etc.
- piercebot 5y agoBlastomere links to Nick Szabo blog posts: https://news.ycombinator.com/threads?id=blastomere https://news.ycombinator.com/threads?id=blastomere ...links to: http://unenumerated.blogspot.com/2005/12/bit-gold.html http://unenumerated.blogspot.com/2005/12/bit-gold.html
- JohnJamesRambo 5y agoThis is a fascinating find. > In humans, blastomere formation begins immediately following fertilization and continues through the first week of embryonic development. They (Nick Szabo?) are posting about this on July 23, 2008 and trying to shill for Bit Gold. The Bitcoin white paper was released on August 18, 2008. > Bit gold was one of the earliest attempts at creating a decentralized virtual currency, proposed by blockchain pioneer Nick Szabo in 1998. Although the bit gold project was never implemented, Szabo's attempt is widely considered to be the precursor to Satoshi Nakamoto's bitcoin protocol. People often try to peg Szabo as Satoshi but I have never felt it is him. Satoshi’s writing tone seems less blunt than Szabo’s. Satoshi is to the point, but Szabo always seems aggressive and confrontational. Shilling for Bit Gold when you are about to launch Bitcoin a month later would be an odd move. Or is it just advanced subterfuge? I guess we will never really know.
- jl2718 5y agoPeople always look to irrationality as the first explanation for bubbles. This is lazy thinking. I find that there are almost always structural cash flows that create them by some sort of economic or regulatory intervention, and the crash by reversal of the same. Similarly, I don’t think there are technology bubbles. Obsolescence is a very slow and steady process while you’re going through it, but everybody remembers that one day the whole world turned in their rotary phones for the iPhone X.
- hardtke 5y agoI wonder how much of current asset appreciation is due to our largest trading partners (China, Europe, Japan, Korea, Taiwan) wanting to make sure they can maintain large trade surpluses to maximize manufacturing employment. Rather than send trade proceeds home, they buy stuff in the US (treasuries and equities) to keep exchange rates stable.
- imtringued 5y agoIt's actually a big reason we gave everyone and their dog mortgages before 2008. Too much foreign savings not being borrowed so the government made it easier to get mortgages.
- jm__87 5y agoI'm not sure I agree. Any valuation for an asset is going to be expressed in terms of other assets. If lowering interest rates to near zero causes a dramatic rise in prices for a number of assets like we have seen in the past year, this doesn't necessarily mean the assets are priced unfairly in relative terms. Same goes for any regulation which creates a favorable environment for a rise in a particular type of asset - that asset may be fairly priced given the context. Usually bubbles by definition have some level of irrationality. The price of asset(s) far exceed what is rational given the context. For example tulip mania, dot com bubble. I guess we do refer to the 2008 housing bubble and I would agree with you there that was driven just as much by systemic issues as opposed to just irrationality.
- 5y ago
- benreesman 5y agoPowell say something spooky about rate outlook and I missed it?
- AnimalMuppet 5y agoHere's my theory of bubbles: You have an asset (doesn't matter what it is). It's going up because the fundamentals improved, or because favorable press, or whatever. That's not a bubble. Stuff goes up all the time. So people start buying it, because it's going up, and they want in on the action. That's still not a bubble. People buy stuff that's going up all the time. Now there's new money flowing into that asset. So now the price goes up because of the new money flowing in, and the new money was flowing in because the price was going up. Now it's a bubble. But it's not dangerous yet. People can lose their shirts, but it won't hurt the overall economy. It becomes a dangerous bubble when (lots of) people invest in the asset with borrowed money. Now if it crashes, it can take banks with it. If that happens at a large enough scale, you damage the economy as a whole.
- mandelbrotwurst 5y agoIf the government deems all banks “too big to fail”, does that remove the risk?
- pxue 5y agono. because bank going bankrupt doesn't wipe away YOUR debt. it wipes away banks obligation to the governing body. also micro-lending will be as big in west as it's in China in the next decade. borrowing 10k to margin trade the stock market is inherently more risky than borrowing 10M for a mortgage.
- Nursie 5y agoHardly, it may (or may not) help to mitigate the fallout though.
- l33tbro 5y agoIf only. The debt becomes worn as inflation and higher taxes.
- asimjalis 5y agoIt makes things worse because the banks now have an incentive to engage in riskier behavior. Their downside is covered by the government and their upside is payoff. So reckless behavior becomes a nobrainer.
- sharadov 5y agoA bubble is an objectively irrational shared belief in a better potential future … No, bubbles in the world of economics are inherently bad, ponzi schemes concocted by charlatans.
- steve76 5y agoSo you believe enough to treat the people who work for you like garbage, make them grovel for a paycheck, if you even pay them, destroy communities with cut throat ambition and turn traitor on people who fought for you and helped you along the way. But you don't believe enough to keep people from robbing your own store or burning down your city or weaponizing the flu to commit horrible worldwide mass murder. Delusions by some of the worst people in the world today.
- megameter 5y agoInside the bubble, this is just called "morale". It's very visible as a phenomenon in gaming. What gets pitched in new games is not rules and assets, but a whole set of beliefs and values: there are games where you are spurred towards world conquest, and games where you are meant to relax and socialize. The value system is literally encoded into the play through those rules and assets. Therefore, game makers have a ready-made market wherever they can pitch people's beliefs back to them, like "I'm secretly the hero", or "playing longer makes me more powerful." And then the negative side of that comes into play when the game pops someone's bubble: "that's unrealistic", "it doesn't let me play how I want", "that other player is using a cheap move" - and it gets really out of control in video gaming specifically when the hype is built on a promise of all possible worlds being contained within the game, or being patched in through updates. Star Citizen has been managing this sort of hype for years, and No Man's Sky had the player bubble popped but eventually came out the other end of it many, many updates later. Cyberpunk 2077 likewise had feverish hype followed by massive disappointment, though that story still has time to play out. I often tell myself to reexamine my grip on things. If I hold an idea too tight, I'm sure to lose objectivity - I don't need a tight grip on anything, just the pragmatically useful one. And playing very difficult games has helped me loosen my grip, in fact; good strategy and techniques often result just from seeing the game as it "really" is and playing into that, and that's a useful life lesson.
- fnord77 5y ago> Star Trek was right about some parts of the future: Material goods got very cheap indeed, and Amazon’s price and delivery speed are rapidly approaching the Replicator. this is not sustainable, at all and will collapse at some point in the future
- deleted 5y ago[deleted]
- cwkoss 5y agoA lot of these examples seem to be conflating normal business cycle peaks with bubbles. I think calling every "thing that goes up and then down later" a bubble is stretching the definition past the point of utility into absurdity. I found this article disjointed and meandering and am not sure what the author intends the reader to take away from it. Smells like an article from someone who likes to call themselves an expert by using buzzwords to reductively categorize history into their personal arbitrary framework, but doesn't have much practical experience in what they preach.
- boringg 5y agoI had a tough time figuring out what the take away was as well. I think my sense is that there isn't a prescription or anything to the article but that a bubble isn't inherently a terrible thing and that there are good things as in the authors argument that bubbles point to a future change based on current [over] optimism. Maybe a silver linings take on the bubbles. I thought it was interesting to think about them but I do agree the vagueness of the take way did leave me wanting more from it.
- ffggvv 5y agonot just that “Enron, Theranos, Long-Term Capital Management, and Countrywide Financial” two of those are blatant frauds and ltcm just had over levered trades go against them. not sure they are examples of bubbles
- siralonso 5y agoThere are plenty of different definitions of the word "bubble" out there, but most of them relate in some way to asset prices coming untethered from fundamentals. For example, here's Schiller's from 2015: > A situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement. You can find more academic definitions, but this one seems pretty spot-on when you hold it up next to the famous manias throughout history. Price increases drive further price increases, because the draw of future price increases is strong and the concept of "overpaying" for an asset ceases to exist. The author, on the other hand, attempts to define a bubble as: > ... an objectively irrational shared belief in a better potential future While it's true that innovation/invention (and sure yes marriage too!) do require optimism and some degree of irrationality, it's a far cry from the "animal spirits" that cause investors to abandon any notion of a fair price in favor of momentum. Sure, in some way bubble-era investors "believe in a better potential future", but it usually seems to be a future of further price increases, and any narrative required to support those prices becomes thinner as the price rises. This can be a lot of fun! However, it is neither sustainable nor a clear net positive. One of the reasons that (certain!) bubbles are so damaging is that the least sophisticated investors with the most to lose get pulled in last. A series of investors are holding the assets through the entire post-bubble price decline - someone "cashing out" at the peak means that someone else is "buying in". It's a little uncomfortable to claim the following benefit to the 2008 financial crisis: > It created more housing inventory, and since the new houses were quite standardized, that made it great training data for “iBuying” algorithms On the other hand, some bubbles do create useful infrastructure - the Dotcom bubble laid a lot of fiber (mentioned in the article), and the railway mania of the 1840s laid a lot of track - although the latter was pretty "inefficient" due to high construction costs, parallel routes, and etc. I'm not really sure what the author is trying to justify here. Bubbles are what they are, we basically know how they work, and we appear to be living in one today! They'd probably be getting a lot less push-back if they avoided trying to re-define the word "bubble".
- sharker8 5y agoThis article is an ingenious version of 'all our investments were too early' defense.
- ethn 5y agoMany of these definitions of bubbles are so broad that any investment can be seen as a bubble, thus there is no bubble-free asset; making it a negligible distinction. A definition I like, from Warren Buffet, on what is a bubble in contrast to an investment: You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more.
- bronzeage 5y agoThis bubble has nothing to do with optimism, or building, or anything productive. It's just the Fed fucking up.