Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Financial Asset Bubble Spotting Isn’t Hard: But Whose Job Is It?

Stock-Markets / Stock Market Valuations Nov 13, 2009 - 04:10 PM GMT

By: Andrew_Butter


Diamond Rated - Best Financial Markets Analysis ArticleThere is no dispute about what happened in USA over the past few years:

1: There was a Tech Bubble – It popped (that caused economic damage).
2: There was a Housing Bubble – It popped (that caused economic damage)

If you go with my definition of what a bubble is:

When market participants lose sight of fundamental value and pay too much – much too much for things, until they all realise they paid too much, after which prices go down and they can’t sell what it was they paid too much for, sometimes for even half the price they paid in the first place, so either they get wiped out or the banks that lent them the money get wiped out.

And that’s zero sum, it just transfers money mainly to rich people (who got in and out early), from poor people (who got in late and out late); less of course “efficiency losses” (the fees that the banking system made out of the “party”).

Then as part of (2):

3: There was a bubble in mortgaged backed securities (people who bought AAA RMBS in 2008 would be lucky to get 50 Cents on the dollar now unless the Fed wasn’t propping the market up).

I.e. the bubble popped (that caused economic damage).

Then as a contributing factor to (3) people like AIG sold insurance on those RMBS (and other debt would not default) far too cheap, and racked up $68 trillion of potential liabilities on that, which might have unravelled if Father Christmas hadn’t turned up to pay Goldman Sachs 100 cents on the dollar.

Now the Fed is lending firms like Goldman Sachs money at 0% interest rates so they can lend it (back) to the Treasury at 3.5% and “earn” their way out of trouble. That is causing economic damage.

Did I miss something?

Alan Greenspan famously said that (a) “if the market can’t spot a bubble then how could the regulator?” And (b) “it’s impossible to know that you are in a bubble when you are in one”.

Yet we hear now from Frederic Mishkin that although he can’t apparently spot a bubble (he certainly couldn’t in Iceland), he can certainly tell a good one from a bad one ( ).

That’s comforting, particularly after Alan Greenspan (who Mishkin presumably idolizes) admitted in so many words that he didn’t have a clue what he was doing for eighteen years, or that is at least the message that I got from the transcript of his public humiliation:

 ( ):

Republican Henry Waxman asked a question: “You have been a staunch advocate for letting markets regulate themselves, and my
question for you is simple; were you wrong?”

Greenspan: “Yes, I found a flaw and…but I’ve been very distressed by that fact”.

Waxman: “You found a flaw in the reality…”

Greenspan: “A flaw in the market that I perceived was the critical function and structure that defines how the world works, so to speak”.

Waxman: “In other words you found your view of the world, your ideology was not right”.

Greenspan: “Precisely! That’s precisely the reason that I was shocked because I’d been going for forty years or more with very considerable evidence that it was working exceptionally well”.

As usual with Alan Greenspan it’s impossible to clearly understand what he was saying, although he did apparently admit that he was wrong (so to speak).

Here’s a notion:

1:        Perhaps he was wrong about not being able to spot a bubble, perhaps just he       couldn’t do that?

2:        If the Fed and other regulators implicitly and explicitly controlled by the Fed are responsible for helping create the bubble(s) in the first place, perhaps they might be persuaded to TRY HARNER when it comes to spotting bubbles?

3:        Perhaps if bubbles are such a potential source of economic damage it might be a good idea to put someone in the job, who at least claims that he has got some idea about how to spot them?


When Secretary Geither presented the Great New Plan for Financial Reform in March 2009, he was on a roll, when someone challenged him about increasing the power to the Fed (the question included something along the lines of “isn’t that a bit like buying your teenager a sports car after he just wreaked the family saloon), he responded:

You can’t fight a fire with a committee.

But why is the focus of Financial Reform on “fighting fires”? 

Ever heard of Fire Regulations?

They are six inches thick and they are all about preventing fires!!

Fighting fires, well anything goes, a fire-fighter has carte blanche to break down doors, climb through windows, spray tons of water all over the place, and selectively save the maidens (Goldman Sachs) and leave the dogs behind to burn (Lehman).

What’s new?

Perhaps if someone had recognised that the bubble that started in stocks in 1996 and the bubble that started in housing in 2000 were bubbles, and had done something about it (George Soros’ sensible suggestion was to get the SEC to limit new IPO’s to contain the Tech bubble, and to limit the amount of liquidity that went into the housing market (like central banks used to do), would have worked, (as would have putting an increasing cap on the LTV of mortgages).

So “putting out the fire” BEFORE it burnt the whole city down would have been quite easy to do, if (a) someone who gave a damn had been bothered to think for ten seconds whether there was a bubble forming or not and (b) had been bothered to do something about it.

That comes back to spotting bubbles:

Talking about stocks, there are three recognized “valuation” approaches to figuring out what is sometimes called “Fair Value” of the stock market.

If I may I would like to use the word “Equilibrium Value” because “Fair Value” means one thing to investment gurus, and something completely different to accountants, and something completely different again to valuation professionals.

The three methods are:

1: P/E rations as per Professor Shiller, this is some sort of approximation of an income capitalization valuation that attempts to discount future earnings based on historical earnings.

2: Tobin’s “q” which is a methodology of calculating replacement costs.

3: Warren Buffet’s method which looks at GNP and stock market capitalization which is in effect some approximation of an income capitalization methodology also.

I’m not going to argue the toss about which is right or wrong or more right or more wrong or why, except to look at the recent track record of these three approaches:

>> In January 2009 Andrew Smithers published a report based on an analysis of “q” saying “the US (stock market) is relatively expensive, being around Fair Value” and “We remain bearish about the outlook for equities for 2009”.

>>At the same time CLSA strategist Russell Napier was saying 400 was “Fair Value”.

>>Warren Buffet had declared that October 16th 2008 was about the bottom and he was “greedily” buying when everyone else was paralysed with fear, (that was when the index was 950 or thereabouts.  So he obviously thought that “Fair Value” was 950 or more.

>>On the other end of the spectrum Jeremy Grantham a proponent of the P/E Ratio was predicting a bottom “below 600” although he didn’t say what “Fair Value” was.

>> On 23rd February 2009 Professor Shiller said that US Stocks were “Fair Value”, (the S&P 500 was 754) but he warned they could “overshoot, by as much as 40%”.

>>In June 2009 The Business Insider’s Henry Blodget reported, “Now, with stocks having surged some 35% in the past three-plus months (up to 939), the broader market is back up to “Fair Value” levels according to the Shiller P/E”.

Clearly there is a range of values depending on your Church, and even members of the same congregation apparently don’t always agree with each other.

Incidentally Nadeem Walayat ( ) who uses a melange of valuation approaches including Elliott Waves predicted the bottom of the Dow at 6,600, but he doesn’t do valuations so I’m not considering his work here (also most Elliott Wave theorists get a different answer from him).

International Valuation Standards

There is another way of doing valuations which is not very popular with stock-pickers although the standards have been in place since 2000 (and they took about ten years to write). One advantage about those standards is that they are approved by every valuation institute of any consequence in the world, although sadly almost no one uses them. They are called international Valuation Standards (IVS).

However, they are a valuation standard, so just for fun (I do valuations so for me that’s fun), I applied IVS to do a valuation of the US stock market and then applied the logic of BubbleOmics ( ).

The outcome of that analysis was:

1: Jan 2009:    The S&P 500 will bottom at 675.
2: Feb 2009:    Then it will rally strongly.
3: May 2009:  The rally will go on at least until the Dow hits 10,000.

It would appear that although using IVS to do a valuation of stock markets is “unconventional”, it does appear to come up with the right answer (note those are the only valuations that I am aware of that have been done of the US stock market using IVS).

But that’s all bye the bye, although for that reason I have compared the FOUR approaches to valuation.

Well apart from the fact that each of the four approaches disagrees on the detail (in my opinion for example the mis-pricing of the stock market in 1929 was much worse than in 2000), big picture they all agree, for example:

1: A regulator might profitably have done something about a “bubble” starting in about 1923.

2: He might profitably have woken up from his slumber in 1965.

3: And again he might have roused himself in about 1996.

That doesn’t sound like an excessive workload, and it really wouldn’t have mattered which methodology he went with (he could have taken an average), he would still have (a) spotted a bubble (b) in time to do something about it.

There is a similar chart on house prices (only IVS and Shiller), both clearly say that in 2000 if something had been done, the house price bubble could have been avoided.


1: It is not impossible to recognize a bubble.

2: It’s not hard to do something about one when you can “see” one.

3: Why on earth do the new Financial Reforms say nothing about doing that?

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


09 Nov 10, 06:14

YOur graph is wrong it says '2110' but you mean '2010'


Post Comment

Only logged in users are allowed to post comments. Register/ Log in