Asset prices are always wrong, in retrospect

One argument against market efficiency is that asset prices are subject to speculative bubbles, where prices rise (or perhaps fall) more than can just justified by fundamentals. Today I’ll discuss why this theory is so hard to evaluate.

During my lifetime, I’ve seen three major asset price movements that looked, in retrospect, rather irrational:

1. The 1987 stock market boom and crash.

2. The late 1990s NASDAQ boom and crash

3. The housing “bubble” of 2006.

During the first 8 months of 1987, the Dow soared by about 40%, and then fell by a roughly equal amount late in the year, with a notable 22% decline on a single day (a record, by far).

After the crash, the pre-crash prices were widely viewed as a bubble, and not justified by fundamentals. Today those prices seem quite reasonable, and if anything it’s the post-crash levels that seem too low. On the other hand, the size of the price change, particularly the 22% decline in a single day, is hard to square with fundamental theories of asset prices, where stocks move only on new information. Nothing occurred on October 19, 1987, that would justify such a large price move. So in one of two respects, 1987 still looks bad for the efficient markets theory.

2. In the late 1990s, the tech-dominated NASDAQ soared from below 1000 to a peak of 5048 in March 2000. Then it fell 1114 in October 2002. During the 21st century, the March 2000 levels have been almost universally viewed as an insane bubble, whereas the October 2002 levels have received little comment. And yet a good case can be made that it is the October 2002 levels that are far out of line with fundamentals, at least based on today’s NASDAQ (over 5800 as I write this post.)

In fairness, the (PCE) price level is up 35% since March 2000, so the real NASDAQ is still considerably lower than at the 2000 peak. Still, even in real terms the NASDAQ is higher than it was just a couple months before or after the March 2000 peak. It should also be noted that the dividend yield on NASDAQ was lower than the real interest rate back then, so investors considerably over-estimated the returns they could expect from buying tech stocks at those lofty levels. I’m not claiming that the March 2000 prices look correct, in retrospect. But then if you go back in time and cherry pick the day when valuations were at their absolute peak, then of course it’s not going to look like the optimal time to buy that asset.

I’d also point to the 1114 low in October 2002, which looks, in retrospect, even more “wrong”. Obviously if I wrote this post in 2002, I would have reached very different conclusions about the 2000 “bubble”. The point here is that in retrospect, previous asset prices will almost always look “wrong”. And since we never reach the end of time, we don’t ever get a definitive reading on what asset price level would have been correct, at any given point in time.

3. As far as the 2006 housing bubble, two subsequent events have cast doubt on whether the prices actually were irrationally high in 2006. First, housing prices in many other countries with similar price run-ups, such as Canada, Australia, Britain and New Zealand, did not crash, and indeed are as high as in 2006, or even higher, even in real terms. (Ireland did crash like the US, to round out the English speaking countries.) Second, home prices in many coastal cities like New York, Boston and coastal California have soared back up to “bubble levels”, and even higher. Many central US regions like Texas never saw a price bubble. Yes, some cities never did recover, but Kevin Erdmann has many posts that provide further evidence that the so-called bubble was not as irrational as it now seems, given what people knew at the time.

This post is also very provisional. In two years, asset prices might be much higher than today and the idea of a 2000 NASDAQ bubble and a 2006 housing bubble may be almost completely discredited. (Just as the 1987 stock bubble was later discredited.) Or asset prices may fall sharply and this post may seem mistaken. That’s why I always try to take a pragmatic approach to bubble theory. What’s in it for me? How do bubble theories help me to live my life more effectively as an investor, as an academic, and as a voter? So far I don’t see much use for bubble theories, but I’ll keep an open mind.

Off topic:  I watched part of Trump’s press conference this afternoon, which reminded me the the “strawberries” scene in The Caine Mutiny.  I’ve got news for Trump—this is your honeymoon period.  It will get far worse.  If Trump’s already showing signs of being mentally unstable after a few minor flare-ups, what’s it going to be like when his administration gets into serious trouble?  Anyone who watched the press conference and still doesn’t understand why I think Trump is a spoiled, immature brat, then, well then I have nothing to say to you.

(Not that I could care less, but the rest of the world is laughing at us.  We elected a right-wing version of Chavez, or if you prefer a Duterte or a Berlusconi.  I feel bad for the reporters who had to sit through that clown show.  And thank God that there are a few GOP senators who are willing to tell the truth.)

PS.  I also recommend this FT article on bubbles:

The background history to these booms confirmed what historians of bubbles had already shown: that they always have at least some backing from the fundamentals. Bubbles may end up being irrationally expensive, but they are not stupid. They arrive when an exciting new development — canals, railways, the internet — creates confusion over the future value they will create. As he puts it, “there was at least some method to the madness of investors”.

He found 72 cases of a market doubling in a year. In the following year, six doubled again, and three halved, giving back all their gains: Argentina in 1977, Austria in 1924 and Poland in 1994.

For doubling in three years, he found 460 examples. In the following five years, 10.4 per cent of them halved. The possibility of halving in any three-year period, regardless of what had come before, was lower than this but not dramatically so: 6 per cent.

On this basis, arguments made by many (including me) that central banks should concentrate more on pricking bubbles before they get too big begin to look threadbare.



33 Responses to “Asset prices are always wrong, in retrospect”

  1. Gravatar of Plucky Plucky
    16. February 2017 at 12:10

    Off-topic, but the tax foundation published something yesterday about the border-adjustment:

    since you’ve asked for info like this before, I figure you’d want to see it

  2. Gravatar of Kevin Erdmann Kevin Erdmann
    16. February 2017 at 12:25

    Policy shocks and real shocks are also important. If pork belly markets collapsed after the imposition of sharia law, it would hardly be evidence against efficiency. For much of the potential home-buying public since 2008, the credit standards of the government controlled GSEs and those imposed by the CFPB might as well be sharia law.

    From Investopedia:
    Islamic law views lending with interest payments as a relationship that favors the lender, who charges interest at the expense of the borrower. Because Islamic law views money as a measuring tool for value and not an ‘asset’ in itself, it requires that one should not be able to receive income from money (for example, interest or anything that has the genus of money) alone. Deemed riba (literally an increase or growth), such practice is proscribed under Islamic law (haram, which means prohibited) as it is considered usurious and exploitative.

  3. Gravatar of Ryan Turner Ryan Turner
    16. February 2017 at 12:26

    I’m not sure your initial premise is sound. You seem to be saying prior bubbles were not overpriced, because the nominal index value at the time was lower than the current index value.

    That makes no sense, we expect asset values to increase over time at least at the rate of inflation, and often at inflation + gdp.

    Those periods are considered bubbles because at the time even the most optimistic projections of future cash-flows could not justify their price. The value of an asset was purely that someone else would buy it from you later, at a higher price.

    Its nonsense to say “the market” was undervalued fifty years ago because it was 300 then and 15000 now.

  4. Gravatar of rayward rayward
    16. February 2017 at 12:48

    We are in another housing and stock bubble. What are all those folks who purchased housing at a time of 3% to 4% interest rates going to do when interest rate rise to 6% or 8% or 10%? Or 18% as occurred in the 1980s! What are all those folks who purchased stock with P/E ratios approaching infinity going to do when the earnings never reach levels to support the P/E ratios? My response: these are not the 1980s, and bubbles today are the result of economic conditions much different than the economic conditions of the 1980s. That does’t mean bubbles won’t burst, because they will. The issue is whether we can keep treading water when the bubbles burst with aggressive monetary stimulus designed to re-inflate the bubble. Or do we follow the path of the Austrians and just let asset prices collapse. That would take care of the bubble and the cause of recurring bubbles, but at a very high cost.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    16. February 2017 at 13:12


    Returns to housing are extremely high right now. Rising interest rates would be a very bullish sign because it would reflect convergence of yields between housing and other low risk investments, and would be accompanied by large increases in residential investing.

  6. Gravatar of ssumner ssumner
    16. February 2017 at 14:03

    Thanks Plucky.

  7. Gravatar of ssumner ssumner
    16. February 2017 at 14:05

    Ryan, I’d encourage you to reread the post, which answers all of your questions.

  8. Gravatar of Kevin Erdmann Kevin Erdmann
    16. February 2017 at 14:12

    Ryan: “Those periods are considered bubbles because at the time even the most optimistic projections of future cash-flows could not justify their price.”

    I don’t think this is as coherent as it seems. If a long-lived asset has a spot value that, in hindsight, reflects future cash flows discounted at 3%, and then some shift causes the spot price to shift down so that future cash flows are discounted at 4%, exactly which of those spot prices can’t be justified? And, by what means?

  9. Gravatar of Jason Smith Jason Smith
    16. February 2017 at 14:20

    Hi Scott,

    I put together a simulation of a potential way to distinguish between a bubble and regular asset price rise using what are effectively Gary Becker’s agents from “Irrational Behavior and Economic Theory” (1962):

  10. Gravatar of Jason Smith Jason Smith
    16. February 2017 at 14:23

    BTW: David Glasner pointed that paper out to me as a possible way to break the language barrier between normal economics and my idiosyncratic approach (slides):

  11. Gravatar of Doug M Doug M
    16. February 2017 at 15:25

    People really don’t understand the Efficient Market Hypothesis. It does not say that prices are in any way “right.” It says that that markets quickly absorbs information. The primary implications of the EMH is that markets are difficult (impossible) to predict. Large and unexpected market movements don’t defy the EMH, they define it.

    Prices moving on no information:
    If the market is highly levered, the price change IS new information. The ’29 crash is the classic example. As the market fell, banks sent out margin calls, this led to forced selling, and more rapidly falling prices. When it was clear that these loans would never be collected, the credit of the banks themselves were put into doubt, and the spiral descended. 2008 was quite similar. The real estate market was highly levered, as were the mortgage banks and the investment banks.

    1990’s tech bubble:
    It is easy to say in hind-sight that the market was experiencing a bubble. In fact it was easy to say at the time. Greenspan made the famous “Irrational Exuberance” speech in 1996. The S+P proceeded to tipple over the next 4 years — Asian Contagion, Russian default, LTCM, Y2K be damned.

  12. Gravatar of Benjamin Cole Benjamin Cole
    16. February 2017 at 16:06

    Excellent blogging.

    For some reason, there is not a clutch of hysterics who scream about “reverse bubbles.”

    Housing is an odd market, in which supply is controlled in a collusion between the propertied and financial classes.

    Also, Fed scholar Andrea Ferraro published a Fed paper in 2012, later revised and published in the Journal of Money Credit and Banking, that large national trade deficits lead to house price booms. Gee, large capital inflows and restricted supply….

    Even in Spain…where English is now the dominant language.

  13. Gravatar of Ray Lopez Ray Lopez
    16. February 2017 at 16:53

    @Sumner – for the Nth time, answer the question: do bubble collapses matter? If not, are you arguing against money illusion, against money non-neutrality, against the wealth effect? Are you arguing against yourself, like an insane asylum patient? Be patient, I have more: some claim, and not just Peter Garber in his Dutch Tulips Mania book, but more recently by Earl A. Thompson ( see, that the Dutch tulip mania was rational, due to a contract language change in law (a rational expectations argument). If, so I ask again: is a bubble that ‘pops’ harmful, does it have a real effect, at the time it ‘pops’? Yes or no? Arguments for “yes” are legion (see the book by GM Rogoff et al, “This Time Is”), arguments for ‘no’ are less so but also present (for example, Latin countries that defaulted / restructured and then used “Brady Bonds” back in the 1980s ended up within months at the same Debt-to-GDP limit as before the default, proving the default ‘did not matter that much’).

  14. Gravatar of flow5 flow5
    16. February 2017 at 17:21

    You don’t need a N-gDp futures market. I’ll teach you how to forecast.

    First, the 1987 drop:

    Conterminously (3 months prior to the crash), the rate-of-change in RRs (the proxy for R-gDp), was surgically sharp, decelerating faster than in any prior period since the series was first published in Jan 1918. The proxy declined from 11 in JUL to (-)4 in OCT.

    Accompanying this sharp deceleration in the roc for M*Vt (proxy for all transactions in Irving Fisher’s truistic: “equation of exchange), the monetary authority mis-judged economic strength, and on Sept. 4 the Fed raised (1) the discount rate 1/2 percent to 6, & (2) the policy FFR 1/2 percent to 7.25 (up from 5.875 percent in Jan).

    On Sept. 30 the effective FFR spiked at 8.38; fell to 7.30 by Oct. 7; then rose to back to 7.61 Oct 19 (Black Monday). Thus, the effective FFR spiked 36 basis points higher than the FOMC’s target (policy), rate on “Black Monday”.

    The shortfall in the quantity of legal reserves (which had already dropped at a rate not exceed since the Great Depression) bottomed with the bi-weekly period ending 10/21/87. This was the trigger.

    At the same time, the 30 year conventional mortgage yielded 11.26 percent, up from 8.49 percent in Jan. 87, & Moody’s 30 year AAA corporate bonds yielded 11.06 percent on 10/19/87, up from 9.37 in Jan. 87.

    The preceding tight monetary policy (monetary policy blunder), i.e., the sharp reduction in legal reserves, had effectively forced all rates up along the yield curve in the short-run (when inflation and R-gDp were already markedly subsiding).

    On 10/19/87 the CBs had to scramble for reserves at the end of their maintenance period (bank squaring day), to support their loans-deposits (contemporaneous reserve requirements were then in effect exacerbating the shortfall & response time). A significant number of banks, with large reserve deficiencies, tried to settle their obligations at the last moment. But the FRB-NY’s “trading desk” failed to accommodate the liquidity needs in the money market – until it was already way too late.

    I.e., it was a major monetary policy blunder by Alan Greenspan.

  15. Gravatar of flow5 flow5
    16. February 2017 at 17:25

    “I’d also point to the 1114 low in October 2002, which looks, in retrospect, even more “wrong”.”

    Both short & long term money flows bottomed in Oct. I.e., Greenspan never eased until October 2002.

  16. Gravatar of Ray Lopez Ray Lopez
    16. February 2017 at 18:10

    OT – WSJ 2/16/17 – “Scott Alvarez, the Federal Reserve’s general counsel, is retiring after 36 years at the central bank. This won’t lead the news, but it should. Mr. Alvarez is one of the most important figures in government.” (Alvarez decided that Lehman could not be legally saved, says Bernanke, a dubious opinion says the WSJ’s author, Peter Conti-Brown, of “The Power and Independence of the Federal Reserve” (Princeton, 2016).

  17. Gravatar of flow5 flow5
    16. February 2017 at 19:11

    The March 2000 levels were reached due to Greenspan’s fear of Y2K computer dated gliches (similar to 9/11).

  18. Gravatar of flow5 flow5
    16. February 2017 at 19:15

    Greenspan said it all:

    Greenspan at the July 1997 FOMC:

    “As you may recall, we fought off that apparently inevitable day as long as we could. We ran into the situation, as you may remember, when the money supply, nonborrowed reserves, and various other non-interest -rate measures on which the Committee had focused had in turn fallen by the wayside. We were left with interest rates because we had no alternative. I think it is still in a sense our official policy that if we can find a way back to where we are able to target the money supply or net borrowed reserves or some other non-interest measure instead of the federal funds rate, we would like to do that. I am not sure we will be able to return to such a regime…but the reason is not that we enthusiastically embrace targeting the federal funds rate. We did it as an unfortunate fallback when we had no other options…”

    I.e., he is wrong.

  19. Gravatar of flow5 flow5
    16. February 2017 at 19:25

    See Daniel Thornton:

    “the interest rate is the price of credit, not the price of money (i.e., the price level.)”

  20. Gravatar of Major-Freedom Major-Freedom
    17. February 2017 at 00:52

    A big problem in how you think, Sumner, and perhaps the biggest reason why you cannot make sense of the market, is your choice to use “equilibrium” concepts and other rigid thought patterns when thinking about price formation.

    For example when you refer to a 22% decline in the stock market index from one day to the next, you think about only the “initial” and “final” prices, and then try to find reasons and information that would be associated with each price. The world was first frozen at t=0 and then an instantaneous change and jump through space time to the world frozen at t=1. Two static cross sections. No fluidity. No movement. No action. No thinking. No TiME.

    In reality, what is takING place over time is a process of millions of separate actions of differences in judgments on the value of stocks and money, which are changing throughout the days and weeks of trading. When you see the price index fall from say 100 to 78 (22% fall) you are in fact viewing investors disagreeing with the (changing) valuations of stocks and money. “Investors” are it actually valuing stocks at 100. What is happening is that the owners of the index stocks believe 100 of money is worth more than the stocks, and the owners of 100 of money believe the index stocks is worth more than the money. And these beliefs are changing throughout the day. And the population of investors are changing as well. Did you know that you are not actually participating in the stock market today when you do not buy a stock today? That you had no effect on the index price? And that tomorrow when you do invest, you do have an effect? And that the effect you have is either well expected and predicted or poorly expected and predicted? The world is not composed of crude aggregate concepts such as “investors” which determines such and such crude concept of an index price. You are seeing the results of millions of independent and changing individual buyer and inidividual seller couplets of valuations. It is not the case that a snapshot stock price is the function of all information disbursed throughout the minds of millions of individuals. It is solely a function of the valuations of a subset of all potential investors, the individual buyers and individual sellers at that moment in time.

    That 22% fall in the stock index which you cannot explain, by way of “published information” readily available in newspapers or whatever, can be explained as the result of individual buyers and individual sellers going in and then out of the market at different prices, some investors, namely a set of individual buyers, believing 100 is actually UNDERVALUED relative to what they expect will happen, while other investors, namely individual sellers believe 100 is OVERVALUED relative to what they expect will happen.

    If the price falls that means the sellers were right and the buyers were wrong. If the price rises that means the buyers were right and the sellers were wrong.

    This is of course a simplified way to look at this, as there are other factors that may lead people to sell a stock they expect will rise, and buy a stock they expect will fall. I am limiting the analysis to investors per se, not temporary investors who cease to be investors after initially being included as investors.

    There is no monolithic “market” that determines fair value of stock to be “right” at 100 and “right” again at 78. No no. There were some who expected wrong and some who expected right. If today some investors buy stock expecting the price to rise, while others, namely the sellers, expect the price to fall, then there is no “market” expectation in the singular. There are, again, disagreements. It is foolish to say things like “the market is most often right” or “the market is always right” or even “the market is most often wrong” or “the market is always wrong”. The market is in fact a particular process of how individuals act over time. It just means how individuals act in an exchange context, that is, producing and trading in the absence of aggression against their person or property from other individuals.

  21. Gravatar of Pemakin Pemakin
    17. February 2017 at 06:01


    While I agree with all your observations on the potential bubbles you cite, you have been a bit US centric. Surely the Japanese asset “bubble” of the late 1980’s has to be up with these in terms of size (remember, the value of Japanese stocks exceeded the US by more than 50%) and also lacks the recovery of your examples. If I remember correctly, Japanese financial institutions traded at upwards of 70 times earnings. Those valuations would still seem “irrational”, even only considering the facts known at the time. No doubt you will cite subsequent monetary policy failures, excessive yen valuation, deflation and anemic growth as reasons why prices did not recover. However, I would be more interested in your thoughts on how it would have had to play out to make those prices seem “rational”.

  22. Gravatar of flow5 flow5
    17. February 2017 at 14:15

    Especially in light of the TDF announcement, the Fed will probably raise rates in mid-March (part and parcel with stop/go monetary interest rate “transmission” management). Inflation, PPI & CPI, has just accelerated and the Fed albeit temporarily, is behind its inflation mandate / presupposed curve.

    The Fed’s obtainable objective – is controlling the price level. It cannot control the stock of employment to any precision thru its supply and demand for money. Interest is the price of loan funds (credit), the price of money (as measured by the rate-of-change Δ, in bank debits) is the reciprocal of the price level (various price indices, or the Fed’s mandate which subjugates the gov’ts incentivized pro-rata share of the basket of actually “consumed” goods).

    The FRB-NY’s trading desk (the U.S. Central Bank) exercises control over bank lending and money stock by its buying (expanding) and selling (contracting) of secondary, generally “off-the-run”, securities, or reserve balance altering operations (reserve draining and injecting operations, smoothing the receipt and payment of IBDDs), the level of required (legal, and in due course “complicit”) member bank reserves (vault cash and deposits at the Fed) in the system (i.e., by controlling “outside” or exogenous money, a DFI’s clearing balances, -> it controls “inside” or endogenous money).

    As Dr. Richard G. Anderson, former senior V.P. and economist at the Maverick Bank, says: “Reserves are driven by payments”.

    Note: Since the DIDMCA of March 31st 1980, all DFIs are subject to reserve requirements:

    Reserve period computations, calculation and maintenance periods, pg. 18 in:

    Unfortunately, according to the “monetary” economists at the Federal Reserve’s long-standing “maverick” District Reserve Bank, e.g., Daniel L. Thornton, Vice President and Economic Adviser:

    See: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series “Monetary Policy: Why Money Matters and Interest Rates Don’t” (his last paper before retirement, note that there is an old Turkish Proverb which states, “He who tells the truth should have one foot in the stirrup”

    viz Thornton: “the interest rate is the price of credit, not the price of money (i.e., the price level.)”

    “The Fed’s lending and investing activities not only change the supply of money, they also change the supply of credit. When the Fed makes loans or purchases assets (any asset) it alters the total supply of credit by the amount of the loan or asset purchase. It is this effect of monetary policy actions that causes interest rates to change. Interest rates would change even if the demand for money were independent of the interest rate. Hence, the interest elasticity of the demand for money is not necessary for monetary policy actions to affect interest rates. The effect of monetary policy actions on the supply of credit is sufficient for interest rates to change…”

    Thus, changes in the composition and size of the Feds’ balance sheet (posited as “normalization”), and Central Reserve Bank Credit, might not be related to legal reserve management (the only available tool at the disposal of the monetary authorities, in a free capitalistic society, through which the volume of money can be controlled (not interest rate manipulation).

    And reserves have not been “e-bound” (binding / restrictive) since Greenspan reduced the level of legal reserves by 40 percent since the S&L crisis, c. 1995 (when he couldn’t, or the banks couldn’t / wouldn’t, expand credit coming out of the 1990-1991 recession).

    The Fed administers (re-sets its policy rate in a series of stair-stepping or cascading pegs) as a barometer, a contrived expectation’s signal and linkage of reserve supply relative to demand – which is a weak yoke or nexus to the entire yield curve’s term structure, to the level of the free-market’s clearing response, or interest rates .

    I.e., it is adjusting its supply of assets, relative to the market’s absorbing factors’ adjustments, principally, repos, currency, Treasury’s General Fund Account.

    Balance sheet:

    vs. legal reserve management:

  23. Gravatar of engineer engineer
    17. February 2017 at 14:33

    To me, the market bubbles that you are talking about is a manifestation of “group think” which us as humans are very susceptible to. Group think and/or confrontational bias is an attributes of 95%+ of people I have meet in my lifetime and that carries into markets.

    To me the arguments about index funds and efficient markets have a type of circular logic. Yes, markets are efficient so invest in index funds. But is everyone or nearly everyone just invests in index funds, how can the markets be efficient? It is blind investing without any underlying knowledge. At some point it breaks down…

    Lots of markets probably look irrational based on the underlying nature of how the risk is structured. The heads I win, tails you lose nature of real estate and finance is to blame. Pump and dump, Ponzi schemes, CDOs with bogus ratings, etc.
    There is also a lot of money pumping up assets based on finding a safe home of money or because of our chronic trade deficits. How much Venezuelan money has gone into Miami real estate or Russian Oligarch money has gone into Manhattan real estate. These are not really irrational, but that are not based on the current value of the future earnings stream.

  24. Gravatar of Steve F Steve F
    17. February 2017 at 16:17

    Ruining a perfectly great post with Trump nonsense. Would it even matter if somebody were able to adequately substantiate why the view that the “unhinged’ and “spoiled” view of Trump is a hallucination?

  25. Gravatar of ssumner ssumner
    17. February 2017 at 17:03

    Ray, Keep those comments coming. . . . keep typing away.

    Steve, You said:

    “Would it even matter if somebody were able to adequately substantiate why the view that the “unhinged’ and “spoiled” view of Trump is a hallucination?”

    If so, it’s a pretty widely shared hallucination! Here’s ultra-liberal Jonah Goldberg:

    “It certainly was entertaining in parts. In other parts, not so much. But the problem is that entertainment value is one of the lowest standards one can hold a president to. It’s entertaining, apparently, to see a man stick a tube up a dog’s butt, but that doesn’t make it art. And it may be entertaining to watch a president of the United States spill out his id on national television like a torn net full of mackerel on a dock. But if that’s a standard for how to judge a presidential press conference, why didn’t we elect Charlie Sheen?”

    Lots of mass hysteria going around these days. Seriously, anyone watching that press conference and not seeing a president make a complete fool of himself has to have some serious ideological blinders on. Think of it this way. When 100% of liberal and moderate pundits agree that someone is a buffoon, and 50% of conservative pundits agree that someone is a buffoon, well then there’a pretty good chance that that person is, in fact, a buffoon.

    Mass hysteria? Yeah, that’s the alternative hypothesis.

  26. Gravatar of Steve F Steve F
    17. February 2017 at 19:36

    Yes it sure is a widely shared hallucination. Read Scott Adams for two months to come down.

  27. Gravatar of Carl Carl
    17. February 2017 at 20:28

    If fundamentals don’t explain these sudden asset price plunges, what does? Animal spirits? Cyclical bouts of paranoia about credit expansion and leverage.

    2008 you’ve explained as a money supply miscalculation by the Fed but I don’t recall you explaining the other crises that way.

  28. Gravatar of David Siegel David Siegel
    18. February 2017 at 00:13


    One thing to keep in mind is that the companies driving the NASDAQ up significantly in 1999/2000 were very speculative Internet stocks. At one point, I think Cisco was valued higher than General Motors. While several survived, most used going public as a way to fund moon shots that didn’t work out. In effect, the public was being used as a venture capital fund. When they all got shaken out and Sarbox came in, the NASD companies changed, so it’s not an apples-to-apples comparison.

  29. Gravatar of Mike Groys Mike Groys
    18. February 2017 at 10:23

    Do you know how old the argument ( that the fed should prick bubbles) is? And do you understand implications of that idea?

    Also, regarding president Trump, you should compare him to the alternatives that American people had. Would American people be better off had they voted for another Saul Alinsky follower?

    Just look at empirical evidence.

  30. Gravatar of Dan W. Dan W.
    18. February 2017 at 14:45


    The price of an asset today is whatever the marginal buyer and seller say is. All the while no one knows the future value of an asset or collection of assets. This uncertainty demands great prudence in using assets as collateral for debt.

    The collapse of the Nasdaq bubble had mild economic repercussions because the collapse in equity valuations did not cause a credit crisis. At that time Investment banks were happy to sell equity in dotcoms but they weren’t going to borrow against the expected future value of dotcom stock.

    With the housing bubble the financial problem became an economic one because there was so much credit tied up in bad housing investment and bad housing loans.

    What is needed is credit policy that decreases debt leverage as equity prices increase. Easier said than done as human behavior is to become more confident in asset prices the more elevated they become.

  31. Gravatar of ssumner ssumner
    19. February 2017 at 14:52

    Steve, All these people told me that Scott Adams was some kind of genius. Then I read him . . .

    So that’s what’s got you guys so confused about Trump?

    David, I agree, but that doesn’t really affect what I said in the post.

    Mike, You said:

    “Do you know how old the argument ( that the fed should prick bubbles) is? And do you understand implications of that idea?”

    Yes, and yes. It’s 88 years old, and it leads to economic instability when it’s implemented. Case in point—>1929.

    Dan, You said:

    “What is needed is credit policy”

    No, credit policies got us into this mess, what is needed is for us to stop doing credit policies.

  32. Gravatar of Major-Freedom Major-Freedom
    20. February 2017 at 13:52

    Unintended (or intended?) consequence #34,475 of state intervention into money production:

  33. Gravatar of Major-Freedom Major-Freedom
    20. February 2017 at 13:53

    >Steve, All these people told me that Scott Adams was some kind of genius. Then I read him . . .

    Not an argument

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