barrons bubble
Source: Barron’s



If you have been paying any kind of attention to the mainstream media the past few years, you may have noticed quite a bit of bubble chatter. We have a tech IPO bubble and a stock bubble and of course a bond bubble. This is caused by a global central bank QE  bubble. We had an Apple bubble, we had a fraud bubble, we had a derivatives bubble and a subprime bubble. Silicon Valley is having a start up bubble, and parts of south Florida and Manhattan are having mini real estate bubbles. The gold and oil bubble came and went. The cover of Barron’s this weekend was literally a bubble – the second such bubble cover in two years.

We have had so many bubbles that, as I first addressed in 2011, we are having a “bubble in bubbles.”

What say we step back and put this into a bit of context?

First off, there have been several legitimate bubbles the past decade or so. In the late 1990s, we had a full-on bubble. In every sense of the word, these stocks rose to bubbly heights, unsupported by anything more than wishful thinking and greed. The Nasdaq plummeted about 80 percent peak to trough; it is still more than 20 percent below its all-time highs.

In the 2000s, what most people describe as the housing bubble, was actually more of a credit bubble. Subprime mortgages and refis went to anyone who could fog a mirror, prompting a spending spree that focused on housing but also included flat panel TVs and cars and home re-modelings. That ended with a national real estate crash of 35 percent. Not unprecedented, as was frequently misreported — the Great Depression was far worse — but very significant.

Its worth noting that as a sector, both home builders and banks lost about 80 percent of their value.

I hesitate to call the 2000s commodity boom a bubble. Commodities are priced in dollars, and the U.S. dollar lost 41 percent of its value from 2001 to 2008. Naturally, anything priced in dollars was going to rally, and once the euro and yen decided to join the race to the bottom, commodities would be at risk. Regardless of bubble status, oil and gold are both off their highs by 35 percent or so.

Which leads me to the point of today’s discussion: In any historical asset bubble, we do not get bubble magazine covers in major news media at the height of the bubble. If anything, it’s the precise opposite. A positive story on gold on the cover on New York Times Magazine in 2011 — and GLD passing SPY as the biggest ETF — marked the top. Perhaps the most infamous was the June 2005 Time Magazine cover on “Why We Love Housing.”

Mainstream coverage of bubble-like events such as panics and manias results from the natural tendency to be part of the exuberant crowd, to contribute to the animal spirits of a bubble in real time.

I am hard-pressed to recall when any sort of bubble was accurately identified in real time on the cover of a major media publication. If anything, the opposite is true.

All of the skeptical bubble talk — and there has been lots — seems to be a contrarian indicator that this long-in-the-tooth, overpriced market might still have a ways to go.



The Bubble in Bubbles (Reflexive Version); May 30th, 2011

Checklist: How to Spot a Bubble in Real Time; June 9th, 2011

Time Magazine Covers & the Stock Market; Jan. 17th, 2011

Category: Contrary Indicators, Psychology

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.

6 Responses to “The Bubble in Bubbles”

  1. supercorm says:

    Like The Onions hillariously said, “it’s the bubbles that are keeping us afloat”.

    The thing is that we know, the problem is when and how. The bond market is the backbone of our financial system. This could be the mother of all bubbles, and this is why it could be ugly for the few that don’t even know we have bubbles around … as long as nothing happen, the innocents look like the brightests of all.

  2. rd says:

    Given the economic conditions, I think most people believe that the equilibrium point for most interest rates would be 1%-2% higher than today but not likely to be 5% higher which would be the type of rise needed to have a full-on plunge in bond asset values.

    However, there is likely a bubble in faith in central bankers and others to navigate the current economic mess around the world. The only reason that many of the asset classes have been bid up to the levels they are at today is that faith. If the faith goes away, there will likely be a quick fall in values of many assets. Very few of the asset classes are outrageously over-valued (bubble territory) but most are well above historic norms related to broad economic measures.

    In 1929, the stock market was somewhat bubbly but it was really the economic collapse that occurred from 1929-1932 that caused it to drop 90% instead of just 50%. That is different from the bubble where a lot of companies vanished without a trace with only a minor recession ensuing so the non-tech components of the S&P 500 just had a mild bear market while the NASDAQ got massacred. So the question today is whether or not a collapse in faith could result in a collapse in the economy which would cause much more than the mild bear market that would bring valuations back to historic norms.

  3. A says:

    Hype it may be, but it does sell a lot of magazines and online subscriptions.

  4. ByteMe says:

    It’s only a bubble in media clichés.

  5. Petey Wheatstraw says:

    Ooooh! Look! Bubbles!

    Welcome to the Lawrence Welk economy.

    An’ a one, an’ a two . . .

  6. [...] Barry Ritholtz, “I am hard-pressed to recall when any sort of bubble was accurately identified in real time on the cover of a major media publication. If anything, the opposite is true.”  (Big Picture) [...]