There are stories everywhere about excesses and bubbles. None seem to focus on the key component to any asset purchase: The Price Paid.

IPOs: Are the DotCom 3.0 IPO companies a bubble? I have no idea. Forget the alternative metrics coming out of Facebook, LinkedIn, Groupon or Twitter: What do they generate in terms of revenue? When will they be profitable? How fast are they growing? A slew of IPOs after a long drought is not proof positive of a bubble, but the prices paid relative to actual metrics of profits, revenues and growth might be.

China: Is China a bubble? I have no idea. The circumstances almost suggest its the wrong question to ask. They are a centrally planned economy — not exactly the land of Adam Smith’s dreams — and will soon have 2 billion people. I suspect the China boom is to accommodate many of its youth leaving the farms. (I assure you the Middle East revolts caught the attention of Cina’s leadership).

Toxic Assets: Junk paper, bad mortgages, CDOs — is there a bubble in this paper still?I have no idea. But I do know that it depnds upon the prices paid. There is actually no such thing as toxic assets — only toxic prices. That mortgage at face value may be a giant loser, but let me pay 20- cents on the dollar, and its no longer toxic at all.

US Bonds: Are bonds a bubble? I have no idea. Historically, yields are as low as they have ever been. And as noted here a year ago, momentum has been taking them higher, it is likely to end badly, and we have  precisely zero idea when the day of reckoning will be.

Stocks: What about current market valuation in the US — is that a bubble? I have some idea on that, and based on current earnings, equities are a bit pricey. The risk factors are if the next economic contraction were to be begin sooner rather than later, that could be problematic for valuations. A pullback in US economic activity would very likely see profits drop sharply. Not like 2007-09 plummet, but a precipitous fall nonetheless. And, the Fed and Congress having zero maneuvering room.

As fund manager Doug Kass says, price is what you pay, value is what you get.


Here is something I do have an idea about: Just as every general fights the previous war, you Humans seem to focus on what just happened, rather than what might likely happen in the future.

Back in 2005, we were still reeling from the dotcom collapse. Yet after missing the biggest bubble in Human history, people were only then seeing bubbles. In fact, they were seeing bubbles everywhere. I termed it a “bubble in bubbles” — which is a catchier version of the Recency effect.

Now we have a new round of bubble spotting, and I go back to my original question:  Is this a question of true bubble valuations, or bad psychology?

Category: Psychology, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “First and Always, Price”

  1. ashpelham2 says:

    This current era is China’s version of the Baby Boom. I could see them running a permabull market, with only hiccups along the way, for 25-50 years. By hiccup, I’m referring to the kind of the market volatility that the US experienced from 1950 until 2007. Some of those were tremendously painful, but the trend was up, and way up.

  2. crutcher says:

    “This current era is China’s version of the Baby Boom.” Wow, very mistaken. The maximum population growth rate was decades ago. The first derivative is now negative (i.e. growth is slowing)

    China hitting 2 billion? I might be willing to take the other side of that bet. The West can’t deal realistically with population problems the way China is being forced to. The Chinese actually agree that there are too many Chinese.

  3. craig.r.jackson says:

    You omitted the most obvious bubble: gold. Everything is in place for that bubble to continue: peak oil, climate change, government debt, inflation, economic malaise. By my estimate, the gold bubble is only a teenager.

  4. ironman says:

    to answer the question of whether a given market is in a bubble, it helps to have a qualitative/quantitative method for detecting bubbles – which is something we’ve developed over the past several years, first for the stock market, and later applied to the housing market and, by extension, to other markets as well.

    By those methods, China is most certainly in a massive economic bubble, with some current indications suggesting that the bubble may be entering into its long-delayed deflation phase.

    That’s scary because a lot of nations have their wagons hitched to China’s growth – a list that includes the U.S., Canada, Australia and Japan to name some of the major economies at risk.

  5. Global Eyes says:

    Bubbles are caused by debt. Is this the most leveraged bubble in world history? I have no idea. You bet it is!

  6. Julia Chestnut says:

    The concept of centralized planning for an economy of China’s scale — and more importantly, scope — boggles my mind. I doubt that the government has as much control of things as we give them credit for.

    I try to stay mindful of the fact that small waves within a big wave may confuse my brain when it is naturally looking for patterns. Fighting the hard wiring takes serious effort.

  7. VennData says:

    Bonds are in a bubble. Enterprises, funds, and non-profits of all types that hold US gov’t bonds will not meet their goals with pawltry yields. The trends that force The Fed, the Social Security administration, China, Japan and other sovereign wealth bond accumulators will reverse.

  8. You sure don’t have a lot of ideas there do ya sonny?

  9. ivanhoff says:

    People have no idea how much a jar of pickles should cost, not to mention something much more complicated as stocks or any other cash flow producing asset class. Value is in the eyes of the beholder; Price is the objective level that clears the supply and demand.

    Without knowledge about past prices and prices of similar assets, we don’t have a basis to compare, which means that we shoot in the dark. The concept of the “replacement cost” is not equally applicable to all assets. Relying on discounting future cash flows sounds fair, but it is not practical as any prediction is a sophisticated guess at best.

    Past prices matter, because they impact expectations and expectations define our risk appetite.

  10. ashpelham2 says:

    I agree that China’s growth rate in terms of population is slowing. That’s an undisputed fact. My comment was regarding all that growth that happened 15-20 years ago in the population, now coming to age to become consumers, and to the fact that we are still talking about 2 BILLION people. And many of them are coming into money for the first time of their lives, even if they are just putting widgets together. China is urbanizing, and with that comes unmeasurable economic growth and demand.

    So, I stand by original theory: while their equity markets may suffer a short-term fallout, their economic engine is growing and expanding. They will be the worlds’ largest economy at some point unless people in this country wake up and realize that we need to innovate and grow, instead of invent, engineer, and ship it all offshore.

  11. Ted Kavadas says:

    I believe that there are many asset bubbles in existence right now.

    I have written extensively on the subject of asset bubbles, because I believe they pose an enormous threat to our economy and markets.

    One of the more interesting speeches I have seen on the subject came from William Dudley last year. The speech was titled “Asset Bubbles and the Implications for Central Bank Policy.” I have commented upon it in a blog post at this link:

  12. constantnormal says:

    I have to agree with Global Eyes … while I saw much in this post that I agreed with, and made good sense, something gnawed at the back of my mind.

    I finally realized what it was — all the bubbles that I am familiar with became bubbled-up via leverage — lots and lots of leverage. One might even say that massive leverage is a “sine qua non” of bubbles in general.

    Looking back at the list of frequently-proclaimed “bubbles”, bonds kinda struck me … we have been in a period of zero or near-zero rates for quite some now, and if that does not spawn bubbles like a hurricane spawns tornados, I don’t know what would.

    Where these bubbles will manifest (or are manifesting, they’re difficult to spot except in hindsight) is anyone’s guess, but I’d be suspicious of a bond market where everything is elevated in price due to artificially low rates.

    And, as Barry notes, “it is likely to end badly”. Bubbles are like that.

  13. zenospinoza says:

    Dragging “bonds” into the asset classes that might be experiencing bubbles is the best example of seeing bubbles everywhere. Bonds have a natural upward bound on prices, notwithstanding the above par / negative nominal yield purchases of Treasury’s that took place during the financial crisis (properly looked at as an “insurance” cost).

    On the other hand, the dropping of corporate yields and spreads to almost zero in the run up to the bursting of the housing / credit bubble should have been a warning that something was amiss. But the real losses were in home prices and derivatives, not bonds (not even AIG’s!).

    To be a bubble, one has to look at the impact of the bubble’s burst – will investors lose 30%, 50%, 100% of their principal? (Even more than 100% is possible with leverage of course).

    Even if inflation erodes the real value of bonds, this is nothing like the leveraged and speculative housing and dot com booms. When folks start paying 10%, 20% 30% above par for zero coupon bonds then we’ll know we have a bubble. Not too likely.

  14. clipb says:

    no way 2 billion . read the “age of aging”. their one child law is going to put them in a bad place. here’s some estimates from the us and the un. basically flat and then down.

    US Census Bureau, 2010 est. [2] :
    2020: 1,384,545,000
    2030: 1,391,491,000
    2040: 1,358,519,000
    2050: 1,303,723,000
    United Nations, 2010 est. [3] :
    2020: 1,387,792,000
    2030: 1,393,076,000
    2040: 1,360,906,000
    2050: 1,295,604,000
    2060: 1,211,538,000
    2070: 1,125,903,000
    2080: 1,048,132,000
    2090: 984,547,000
    2100: 941,042,000

  15. larrr1 says:

    “As fund manager Doug Kass says, price is what you pay, value is what you get.”

    In point of fact, Ben Graham is the original source of that phrase.

  16. crutcher says:

    “now coming to age to become consumers” – except they aren’t really consuming – not yet anyways. China doesn’t have the advantage the baby boomer generation (my parents) did. They don’t have easy access to energy within their own borders, high demand for labor (under population relative to economic need) nor geopolitical dominance. They are also hitting an ecological wall in a way that we never have so far.

  17. jb.mcmunn says:

    “Bubble in bubbles” is the absolutely perfect term. In the old days we’d just say things were overpriced, frothy, etc. Bubbles are more frenzy than enthusiasm, they are more mania than optimism, they are when people have lost their senses not merely lost sense of value.

    China is not a bubble. China is TNT left out in the desert sun that’s starting to “sweat”:

    Not enough food.
    Not enough water.
    Poor infrastructure.
    Wallowing in pollution and filth.
    Non-homogeneous language and culture.
    “Ant tribes”
    Poor property rights and human rights.
    Mercantile command economy run by former Maoists (Sounds like a TV sitcom idea).
    Widespread fraud and corruption at every private and public level.

    The malinvestment, corruption, and decades of political repression will combine in very bad ways. On second thought, make that very, very, very, very bad.