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Speak for your own country, not mine. It's very obvious that in NZ, due to various factors (the most obvious being very favourable taxation or a lack thereof, b

Speak for your own country, not mine. It's very obvious that in NZ, due to various factors (the most obvious being very favourable taxation or a lack thereof, but also our own wee sharemarket mania and crash in the 80s) money available in the market for investment poured into residential property instead of productive investment. Just because the bubble hasn't burst yet, doesn't mean it's not a bubble. https://www.rnz.co.nz/news/business/437107/housing-affordability-worst-in-at-least-17-years-report-finds https://www.rnz.co.nz/news/business/437107/housing-affordabi...

eru 3y ago
How do you define 'bubble'?
- EdwardDiego 3y ago
  How do you?
  - eru 3y ago
    Wikipedia opens with 'An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify.' I would add that for a definition of 'bubble' to make sense, it should be identifiable to a contemporary observer, and should reliably predict a coming drop in asset prices in that observers future. Reliably enough to (theoretically) trade on it. The last part is important: a bubble call doesn't need to be 100% accurate; just needs to be right often enough to turn a profit. But also: a predictable drop in asset prices by themselves does not indicate a bubble. For a simple counter example, have a look at far out-of-the-money call options. Most of them expire worthless in the future, but that doesn't mean that their proper price is 0. (Or for a more down to earth example: most of the time no accidents happen, but insurance is still worth more than zero a priori, even if it's worthless most of the time a posteriori. Insurance is not a bubble.) Financial markets, especially financial markets that allow easy short selling, are almost never in a 'bubble'.
- yobbo 3y ago
  Related, but; "speculation" is defined as the expectation that the residual price of an asset will be higher than the cost of buying it. Bubble can be defined as when the general price level in a market is decided mainly by speculation.
  - eru 3y ago
    > Related, but; "speculation" is defined as the expectation that the residual price of an asset will be higher than the cost of buying it. That's a very impoverished definition. It leaves out speculating on falling prices by short-selling. Or speculating on (or against) volatility, instead of a specific price move. Or speculating that certain correlations will stay relevant (or will cease being relevant). > Bubble can be defined as when the general price level in a market is decided mainly by speculation. Speculators try to guess at future conditions and benefit from anticipating them today. If they anticipate a lower price in the future, they might short sell. If they anticipate a higher price they might buy. Acting on the expectation tends to bring the anticipated future price into the present. But there's no reason it should be particularly high or particularly low. Financial markets are all about this kind of anticipation. Eg you buy a zero coupon bond, because you expect it to be more valuable in the future than today. That doesn't mean zero coupon bonds are always in some kind of bubble. See also https://ms.mcmaster.ca/~grasselli/Garber89.pdf https://ms.mcmaster.ca/~grasselli/Garber89.pdf for an investigation into how the old story of the prototypical bubble, the Dutch Tulip Mania, doesn't hold up to scrutiny.

eru 3y ago

How do you define 'bubble'?

EdwardDiego 3y ago
How do you?
- eru 3y ago
  Wikipedia opens with 'An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify.' I would add that for a definition of 'bubble' to make sense, it should be identifiable to a contemporary observer, and should reliably predict a coming drop in asset prices in that observers future. Reliably enough to (theoretically) trade on it. The last part is important: a bubble call doesn't need to be 100% accurate; just needs to be right often enough to turn a profit. But also: a predictable drop in asset prices by themselves does not indicate a bubble. For a simple counter example, have a look at far out-of-the-money call options. Most of them expire worthless in the future, but that doesn't mean that their proper price is 0. (Or for a more down to earth example: most of the time no accidents happen, but insurance is still worth more than zero a priori, even if it's worthless most of the time a posteriori. Insurance is not a bubble.) Financial markets, especially financial markets that allow easy short selling, are almost never in a 'bubble'.
yobbo 3y ago
Related, but; "speculation" is defined as the expectation that the residual price of an asset will be higher than the cost of buying it. Bubble can be defined as when the general price level in a market is decided mainly by speculation.
- eru 3y ago
  > Related, but; "speculation" is defined as the expectation that the residual price of an asset will be higher than the cost of buying it. That's a very impoverished definition. It leaves out speculating on falling prices by short-selling. Or speculating on (or against) volatility, instead of a specific price move. Or speculating that certain correlations will stay relevant (or will cease being relevant). > Bubble can be defined as when the general price level in a market is decided mainly by speculation. Speculators try to guess at future conditions and benefit from anticipating them today. If they anticipate a lower price in the future, they might short sell. If they anticipate a higher price they might buy. Acting on the expectation tends to bring the anticipated future price into the present. But there's no reason it should be particularly high or particularly low. Financial markets are all about this kind of anticipation. Eg you buy a zero coupon bond, because you expect it to be more valuable in the future than today. That doesn't mean zero coupon bonds are always in some kind of bubble. See also https://ms.mcmaster.ca/~grasselli/Garber89.pdf https://ms.mcmaster.ca/~grasselli/Garber89.pdf for an investigation into how the old story of the prototypical bubble, the Dutch Tulip Mania, doesn't hold up to scrutiny.