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
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Boombustology: Spotting Financial Bubbles Before They Burst

InvestorEducation / Resources & Reviews Apr 19, 2011 - 09:40 AM GMT

By: Douglas_French


Best Financial Markets Analysis ArticleCheap and plentiful money and credit have made investing impossible and speculation de rigueur for those not wishing to wait out the storm with the barbarous relic. The father of value investing, Benjamin Graham, distinguished between the two:

Investment is most successful when it is most businesslike. An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Government's debauchery of money to further its aims is as old as time. But Ben Bernanke's central bank has turned more tricks than the Bunny Ranch, and the money supply has finally responded to his goosing.

Reporting on April Fools' Day, the Wall Street Journal's Matt Wirz and Serena Ng broke the news:

Subprime and other residential mortgage bonds that helped trigger the financial crisis are back in vogue with long-term investors, in the latest sign that American credit markets are healing after the worst downturn in a generation.

The price of this paper, once considered so toxic, has doubled since the end of the financial world was feared a couple years ago.

When a local banker told me last week, "we're lending money again," I replied, "lending officers are paid to say their bank is lending, even when they can't get a deal approved."

"No, we're really lending. In fact, our builder finance group is out looking for deals."

These anecdotes should give Keynesians comfort that bankers did not develop long memories in the wake of the financial meltdown.

So the commercial and shadow banking systems are gearing up and the money is flowing. But where? Bill Bonner and Addison Wiggin wrote in Financial Reckoning Day Fallout,

The problem with all money is that it is as fickle and unreliable as a bad girlfriend. One minute she goes along with the flow. The next minute she turns silly and bubbly. And then, she gives you the cold shoulder.

So, are markets a puzzle or mystery? That's the question Vikram Mansharamani poses at the beginning of his excellent Boombustology: Spotting Financial Bubbles Before They Burst. Mr. Mansharamani teaches a seminar at Yale, entitled "Financial Booms and Busts," and his book is structured as a class on the subject should be. He uses a clear and systematic approach to a subject that is murky at best.

The author draws from a variety of disciplines in his quest to understand booms and crashes, spending the first part of the book explaining the lenses that he uses to examine these events. He disposes of the efficient-market hypothesis in his microeconomic lens and instead opts for George Soros's theory of reflexivity.

Thankfully, the Yale instructor is clearer in his writing than Mr. Soros. Instead of higher prices meaning lower demand and lower prices increasing demand thus leading to equilibrium and efficient markets, reflexivity takes into account human behavior.

Markets shape participants' thinking, and participants' actions in markets shape market prices. Therefore, during booms, increasing asset prices lead to further increases. In busts, it's the reverse.

Soros is unique in suggesting that observers actually change the reality that they are diligently trying to observe, and that this changed reality in turn affects their perception, creating a self-reinforcing cycle that compounds misperceptions.

Ironically, the author looks to the Austrians for the greater part of his macroeconomic perspective (along with Hyman Minsky), leading with a quote from Mises and quickly recognizing fractional reserves and central banking as culprits in bubble creation. Mansharamani uses the work of Roger Garrison to great effect. Those who have seen the Mises Institute's business-cycle T-shirt will recognize the graphical representation of malinvestment through low interest rates pioneered by Garrison.

Behavioral economics provides the theoretical underpinnings for the psychological analysis. Property rights, taxing policies, and the like form Mansharamani's political lens, and the likening of human behavior during booms and busts to fevers and insect swarms provides the biological framework.

Academic economists will likely take the most issue with the author's use of psychological and biological insights to explain extraordinary market behavior. But anyone who has negotiated with their spouse over what to list their house for — or lived through an actual boom and bust — will appreciate the biases identified by behavioral economists and herd behavior.

The Yale lecturer then points these lenses at five bubble-and-crash episodes, from Tulipmania to the recently busted housing boom. The Austrian view is used throughout, including this writer's work on the Dutch monetary environment during Tulipmania and Mark Thornton's skyscrapers and business-cycle research, which is mentioned multiple times: the 1920s boom, the Asian contagion, and in a chapter contemplating whether China is a bubble on the verge of collapse.

The author's recounting of the Florida land boom that preceded the 1929 stock-market crash and Great Depression is especially good as Mansharamani cites the fresh and insightful perspective of Frederick Lewis Allen, whose book Only Yesterday was published in 1931.

Prohibition funneled money into Florida like nowhere else because the Sunshine state was what William Johnson Frazer called "one of the country's leakiest spots on the country's dry border." Illegal booze was being sailed into Florida and the money was flooding into Florida banks. Regulations required that bankers do business in their home state, and Florida's bankers figured they couldn't get hurt in the dirt.

As wild as the valuations became for property values and stock prices during the Japanese boom, that was nothing compared to the frenzy for golf-club memberships. Citing Christopher Wood's definitive work on that episode, the total market value of golf-club memberships peaked at $200 billion, despite Japan having only 1,700 golf courses.

Loose money always gushes into Picassos and van Goghs during booms, and Mansharamani provides an interesting sidebar with a chart of Sotheby's common stock going back to mid-1988, just before the final run-up of the Japanese stock market. The stock price for the auction house peaked as the Nikkei was peaking. It ran to higher highs as the Internet bubble was cresting. Sotheby's ran to all-time highs with US house prices in 2006/7 and has run up again since the '08 crash with the China boom and the Federal Reserve's QE1 and 2, and currently is trading near the high of $58 a share set in October 2007.

Anyone teaching a course on financial markets or speculative bubbles will want to use Boombustology. The book is laid out in perfect fashion to teach from, only lacking study questions. But will investors be able to use Mansharamani's for profit? In the book's introduction, Yale University's Chief Investment Officer David F. Swensen, writes that the author falls short of aiding investors in making money. Mansharamani gives us some whys and things to look for, but doesn't tell us when. "Early looks a lot like wrong," writes Swensen.

A bubble wouldn't be a bubble if you could connect all the dots. Mr. Swensen should stick to crossword puzzles. These days, markets are for speculators only.

[Boombustology: Spotting Financial Bubbles Before They Burst • By Vikram Mansharamani • John Wiley and Sons, 2011 • 304 pages. Available now in the Mises Store.]

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - 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.

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

Post Comment

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