I like this list from Dougie:

  1. Debt is cheap.
  2. Debt is plentiful.
  3. There is the egregious use of debt.
  4. A new marginal (and sizeable) buyer of an asset class appears.
  5. After a sustained advance in an asset class’s price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
  6. The distance of valuations from earnings is directly proportional to the degree of bubbliness.
  7. The newer the valuation methodology in vogue the greater the degree of bubbliness.
  8. Bad valuation methodologies drive out good valuation methodologies.
  9. When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
  10. Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed “financial weapons of mass destruction”).

Based on this, ts tough to claim this is presently a bubble.



10 Laws of Stock Market Bubbles
Doug Kass
RealMoney.com, Nov 12, 2013

Category: Markets, Psychology, Rules

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.

11 Responses to “Kass: 10 Laws of Stock Market Bubbles”

  1. mllange says:

    7 (at least) out of 10 ain’t bad.

  2. b_thunder says:

    Speaking of bonds, and especially about Government Bonds:
    1 – True
    2 – True
    3 – True
    4 – True (The Fed)
    5 – 50/50 (new era thinking that bond prices never go down, inflation cycle ah been defeated)
    6 – Not sure how exactly to apply this to bonds, but yields have been pretty low until a few months ago
    7 – False
    8 – 50/50 (the methodology is not new, but people are picking 5bps in front of a steamroller)
    9 – In Fed We Trust!
    10 – Mostly False, however there’s a spike in covenant “light” junk bonds

    IMHO, there IS a bond bubble. How soon and how much it will deflate and how it will affect other prices is the Great Unknown.

    • ch says:

      A quick jaunt through economic history texts would suggest that when the biggest new marginal buyer of a nation’s debt is that nation’s own central bank & that bubble bursts, the symptom of & outcome of that bubble bursting (the credibility of the nation’s central bank) is exactly what we’re seeing…signif incr’s in equity prices, artwork, classic cars, farmland, jewelry, etc.

      I agree with you b_thunder…but IMO the $64,000 question is what happens when the Fed bubble bursts…in 2003-2005, despite evidence of excesses, the great “unchallengeable meme” of the time upon which all of modern finance rested was that “home prices have never dropped nationally”.

      The great “unchallengeable meme” that all modern finance rests upon now is that “the US cannot have a currency crisis.”

      FWIW, given their massive purchases of gold (& oil fields, farmland, copper mines, etc.), our biggest creditor seems like they beg to differ with our new “great unchallengeable meme”…

      • gman says:

        Given the large % of the US economy is strictly domestic and yet we run trade deficits, it seems like a currency devaluation would be blessing not a curse. Not that all the central banks of the surplus nation would allow this to happen though, we can always dream!

      • gman says:

        Ag prices are cratering harder than gold!

    • b_thunder, I was going to post almost exactly what you wrote, but saw your comment first.

      I would add to 5: another aspect of “new era thinking” is that Feds will never let large financial institutions suffer.

      I would add to 6 & 7: Negative real interest rates on short- to medium-term bonds is a good metric of “distance of valuations from earnings” (in a bond context). Negative TIPS yields show the degree of bubbliness in all bonds. Sane investors would not accept negative real yields if they could find an alternative.

      With regard to 7 & 8: No need for a mass-market valuation psychosis; the extreme valuations are being forced upon the market by the Fed. So 7 is irrelevant and 8 is True – the Fed’s bad bond valuation method has driven out all the market-based methods.

      With regard to 10: QE is playing the role this time of the “new financial product that is not understood”. It’s not unreasonable to expect that turning off QE in 2014 will be like trying to stop NINJA No-Doc Alt-A ARM mortgage lending in 2007, in the sense that a badly-managed contraction in the supply of credit will trigger a market crisis. Also, for good measure one should note that student loans, consumer auto loans (as currently being sold and used), and stock market margin loans are also bubbly.

  3. constantnormal says:

    I think the Fed has control of the bond bubble (they are certainly the major force driving it), but whether or not they will be able to gracefully let the air out is another thing entirely. I expected the Fed to scale back the Q3 bond buying in sync with the Treasury’s reduction in debt issuance this fall, but when the Treasury got cold feet, that opportunity fell through.

    Treasury Delays Plan to Trim Borrowing (WSJ)

    If and when the Treasury proceeds to alter their borrowing activities, that would be the ideal time for the Fed to experiment with slightly larger reductions in QE3 purchases.

    I think the thing that is the big unknown in all this is how much of a rate increase is already baked into the expectations of the markets/bond-buyers, and at what point will a more rapid rate increase lead to emotional misbehavior …

  4. Whammer says:

    Any opinion on Hussman’s latest: http://www.businessinsider.com/hussman-corporate-earnings-coming-2013-12

    Of course, Hussman has been pretty consistently wrong for several years running, so that might be the Occam’s Razor way to treat this…….

  5. Chief Tomahawk says:

    11. The next generation sees how the previous generation got away with the biggest financial heist of all time, and wants go on a binge of their own…

  6. carchamp1 says:

    There have only been two stock bubbles in at least the last 100 years. Only the late 1920s and late 1990s (and briefly in 2000) apply. Real estate in the mid-2000s and commodities in the late 1970s/early 1980s and now? Yes, bubble. And, oh, there is currently the bitcoin bubble.

    Not sure how to even measure 1 and 2, but 3 has certainly been a factor in some of these bubbles. 4 – 10 look good, too, although they don’t always apply. Overall, very good list. I think numbers 4 and 5 are the most important. Participants in these bubbles were drinking the kool-aid. That’s the bottom line.