Here’s Why Everyone Is Warning About Bubbles

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I am hearing so many warnings about bubbles recently and so I’m thinking about why so much with the bubbles?

Even recent Nobel winner Robert Shiller is making suggestions about various markets around the globe including US equities.

This is on top of guys like Hussman, Yardeni and Kass all talking bubbles not to mention most finance media publications.

Its not just equities and bonds, as the bitcoin chart goes vertical, we are getting conjecture on that front as well.

While Ive been studying bubbles pretty closely for more than a decade, to be honest, I have no idea what is or is not a bubble usually until after the fact. Sure, there are symptoms but sometimes those manifest well before the bubble itself and sometimes there is no bubble and it just looked a bit like one.

Might bitcoin be a huge bubble and it goes to zero?

It looks kinda like a bubble to me, but what do I know about distributed cryptocurrencies? Be honest, you know little about them too and you’re not an expert because you read the Reddit or discovered 4chan. Could bitcoin also be 10-100x undervalued? Why not? 

Might US equities be in a bubble?

Yes. Could they just be getting going, completely undervalued and on their way to SPX 3000? Yes. Why not?

So, I have no insight for you regarding whether or not this, that or the other market is a bubble.

Sorry.

My gut is that we have less bubbles relative to the bubble mongering but that is just a guess too.

I do, however, understand why investors, academics, pundits and journalists are so preoccupied with bubbles and so are warning us about them around every turn.

Over the past 13 years, we’ve had two of the largest bubbles in the history of the universe (the NASDAQ and housing bubbles).

These had a profound impact on the experiences of many and made indelible impressions on our individual and collective psyches.

As members of such a fast paced culture, we have this tendency not to focus closely on the impact of extreme experiences and how they might affect our feelings, memories, focus of attention or how we go about making sense of the world. Instead, we keep going forward and neglect the things we go through even when they affect us in a big way. We don’t fully process them and so they just hang there. 

When an event has a profound impact, it replays in our minds for quite a long time rolling around up there, affecting the things we pay attention to, how we perceive and how we construct the world around us.

Years ago, Kahneman and Tversky used the term availability heuristic to describe something similar but I think of it more in terms of the way clinical researchers think about the psychological effects of trauma. Often, people re-experience or preoccupy on the trauma in an attempt to process it and integrate it into their sense of who they are and their life narrative. This can go on for quite some time.

So we had these two gigantic bubbles and we were all affected and the culture was affected and yet we don’t really acknowledge how affected we were and how the remnants of those events shade our interpretations of present experiences.

Meanwhile, the partially unprocessed memories of these salient events keep us hyper reactive to outside stimuli, especially ones that even remotely resemble bubbles.

So when we see an asset class moving higher and higher, we have this tendency to survey our minds for available episodic memories that look similar and viola, we think of bubbles.

Notes

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