But your wealth compounds much more slowly at bubble pricing, and your income also falls behind. When farms or commercial forests, for example, double in price so that yields fall from 6% to 3% (as they actually have) you feel richer. What nobody seems to discuss is that higher-priced assets are simply worse than lower-priced ones. To allow bubbles, let alone help them along, is simply bad economic policy. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. Even more dangerously for all of us, the equity bubble, which last year was already accompanied by extreme low interest rates and high bond prices, has now been joined by a bubble in housing and an incipient bubble in commodities.
equities, and the potential pain has increased accordingly. But during the year, the bubble advanced to the category of superbubble, one of only three in modern times in U.S. This time last year it looked like we might have a standard bubble with resulting standard pain for the economy. So, once more unto the breach, dear friends. I doubt speculators in the current bubble will listen to me now but giving this advice is my job and possibly the right thing to do. The experience also makes it easy for me to sympathize with the view that bearish advice in bubbles always comes from old fogeys who “just don’t get it,” because I received that old fogey advice back then and just didn’t listen. This taught me a lesson, and it helped make me cautious. My main stock, American Raceways, tripled while I was on vacation – $7 to $21 – then went to $100 by Christmas, only to lose it all even quicker by the following June, as almost all the fireworks exploded and crashed.
#WILD RUMPUS DEFINITION FULL#
I participated in a wonderful micro-cap fireworks display from 1968 to 1969, in which I made a small fortune (7 times the then full cost of a year at business school). For bubbles, especially superbubbles where we are now, are often the most exhilarating financial experiences of a lifetime. In a bubble, no one wants to hear the bear case. The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time. In each case, these shared characteristics have already occurred in this cycle.
#WILD RUMPUS DEFINITION SERIES#
Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. we are in the fourth superbubble of the last hundred years. All five of these superbubbles corrected all the way back to trend with much greater and longer pain than average. There were also superbubbles in housing in the U.S. But before they did, a handful went on to become superbubbles of 3-sigma or greater: in the U.S. All 2-sigma equity bubbles in developed countries have broken back to trend.
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