Daan Joubert December 13, By definition, a market bubble is not a very obvious affair. If the man on the street begins to see what by all accounts is a bubbly market, he will act rationally, or so the academics believe, and find a safer haven for his savings. Which means that in principle, if markets were truly rational and relied on tried and trusted measures of investment value, then bubbles could never develop.
December 23, Introduction In the first part of this series we looked at factors that could contribute to a market bubble on Wall Street — if there is really one, of course. Keep in mind that about 3 out of 4 Americans believe, nay, truly know that the end of the Great Bull Market still lies many years and many thousands of Dow points into the future.
The majority of market gurus regularly tell them so, which means it is true. Investors also have faith in the ability of the Fed to manage the economy and the markets to ensure a never-ending increase in GDP and in company earnings, thus to sustain the long term bull trend in all market indices.
And when things go wrong, as they did briefly in and even more so inthe Fed will extend a helping hand to ensure that nobody really loses any money. These people do not even consider the possibility of there being a market bubble.
They know full well there were some doomsayers who believe so, and we all know how much money their views have made them over the past few years. This species is now practically extinct. In the words of a senior strategist at one of the large brokerages in New York, quoted in the media in mid December, "The only bears in New York are found in the zoo.
At the moment the ratio is substantially higher than ever before during this period. It can also be seen from the charts that whenever the relative level of debt has peaked, the high in the ratio was followed by a steep reversal in private debt relative to disposable income that lasted at least a good number of years.
It can be speculated this decline in the ratio is the reaction of people who have felt the pinch of having to service too much debt and who have taken concerted action to improve the state of household finances by reducing the gearing.
Logic says that when people have expanded their relative level of debt in a climate of perceived wealth and a growing economy to where it begins to hurt, they undergo a major change in sentiment in their perception of the advantages of debt.
The current cycle of increasing consumption expenditure relative to disposable income — see Fig. Over the 7 years to Septemberthe amount Americans had available as disposable income increased from R4.
Americans were spending substantially more than their increase in income — partly as a result of reduced savings, but also assisted by an increase in debt. We make the assumption that America, as happened quite often in the past, is approaching a point in time where consumers begin to feel they are carrying too much debt and could soon be repeating earlier behaviour by reducing their relative exposure to debt.
As discussed in Part 1, the ratio of debt to disposable income shows that there are distinct cycles in the degree of borrowing and use of credit. Whenever the load of debt becomes too great, American consumers enter a period where they reduce their relative exposure.
The actual figures show that during recent cycles when the ratio of dent to income declined, the amount of debt remained stable or even continued to increase gradually. The ratio of debt to income therefore declined because disposable income kept on increasing — a benefit of the strong GDP growth of the middle to late 90's.
This is an important point to keep in mind. Yet, even if the amount of debt merely remains stable, this would imply that funds to fuel growth in consumer expenditure will increase at a less steep rate than before.
Further, if interest rates continue to increase, following the yield on the 30 year Treasury bond that is at 2-year highs, consumers might be compelled to cut back on their debt and begin to repay loans and reduce outstanding credit.
If this should come to pass, the cooling effect on the strong and sustained growth in consumer spending of the past 7 years will be even more marked. If there is a risk of reduced growth in consumer spending, the US GDP and company earnings too will suffer a reduction in the growth rate that people have become accustomed to over the past few years.
How serious this cooling effect is likely to be is of course highly speculative and will be discussed later.
In this part of the series the question of market bubbles is addressed. We will try to identify certain features that could let us decide whether there really is a bubble or not. In the final parts, the overall situation of the market is evaluated to determine how robust the bull market really is and to what degree the characteristics of a bubble are present.
Finally, we will turn to the more speculative process of trying to put all the information together in an attempt to peer into the future, and thus to determine the likely aftermath of what is happening on Wall Street right now.
One man's bubble is another's bull market. How does one distinguish between a normal strong bull market and a developing bubble? The people in all kinds of markets can be loosely grouped into two categories — investors and traders, or speculators.
I would suggest that a market is "normal" when there is a certain proper balance between its populations of traders and investors. What this proper balance is can vary from market to market, and the ratio is not critical — up to a point. For as long as this balance is maintained, the market is rational, almost as if the one section of the market keeps the other "honest".So, with some fancy games and pliant appraisers, the bank recorded a $2 million gain on its deal making.
The reality, however, was that $9 million had gone out the door, the bank was paying 15% interest to depositors, and no money was coming in, not even interest payments. An automatic fire sprinkler doused a fire at the Keola La‘i condo tower early Friday morning and one resident sustained a lower-leg injury from the incident, Honolulu firefighters said.
When it hit, it wasn't like the movies, there were no zombies. It wasn't World War III, and the attack itself was barely visible. The aftermath, however, was far worse than any Hollywood movie could ever portray. Roger Scruton is the world's preeminent philosopher in the field of aesthetics.
Having graduated with honors from Cambridge, he has subsequently held positions at some of the world's most prestigious institutions including the Universities of Cambridge, Oxford, St Andrews, Princeton, and Boston.
The Dot-com Bubble of the s and early s was characterized by a new technology which created a new market with many potential products and services, and highly opportunistic investors and entrepreneurs who were blinded by early successes.
(This article is under construction – come back soon!) The second half of the s marked the sudden rise of a new sort of economy, one in which stock markets experienced high growth rates under the influence of venture capital and IPO-funded companies in the Internet sector and related fields.