The importance of bubbles that did not burst
Some booms do not go bust, making it harder to spot the ones that will
February 10, 2017 by: John Authers
Is there really such a thing as a market bubble? I feel almost heretical answering this question. I and most readers have lived through two decades that were dominated by two vast investment bubbles and the attempt to deal with their consequences when they burst. Getting into definitions is beside the point. As US Supreme Court Justice Potter Stewart once said to define pornography: “I know it when I see it.” And there is no point in arguing that the dotcom bubble that came to a head in 2000, or the credit bubble that burst seven years later, were not bubbles. I know a bubble when I see one, and they were bubbles. For those of my generation, spotting bubbles before they get too big, and thwarting them, seems to be vital for regulators and investors alike. The history of financial bubbles is long and fascinating. The greatest bubbles in history have many common characteristics. After the disasters of recent years, investors have been spurred to rake over that history. Events from the 16th century Dutch tulip bubble through to the Panic of 1907 have been raked over for their significance. But in a great new compendium on financial history, several writers make the same points. The number of bubbles in history is very small. That makes it hard to draw any valid inferences from them. Further, definition is a real problem, and not just one for linguistic nitpickers. History’s acknowledged bubbles all have one critical factor in common; they burst. But that gives us a one-sided view. We need to look at those bubbles that did not burst and the crises that did not happen. Once looked at this way, the dilemmas of dealing with bubbles grow more intractable. It is harder for investors to take evasive action. The critical policy question of whether central banks and regulators should prevent the formation of bubbles also grows harder to answer. Yale’s Will Goetzmann complains that bubbles are booms that go bad — “but not all booms are bad”. Using data for national indices from a range of countries in the 20th century, he found that after a boom, crashes that gave back all of their previous gain were more rare than instances where prices doubled again. He defined a bubble as an extreme acceleration in share prices. In one version, he required them to double in a year — which excluded the dotcom bubble and the Great Crash of 1929. To keep them in, he also tried a softer version where stocks doubled in three years. 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. At a minimum, he has provided historians with a fascinating new pool of bubbles that we should now try to explore. They range from the easy to explain — anyone who knows anything about 20th century history can work out why the German stock market dropped 84 per cent in the five years after it doubled in 1940 — to the far more baffling. If any reader knows what went wrong for New Zealand stocks after 1986, or Norwegian stocks after 1973, it would be most interesting to hear. As for the booms that went on, try postwar Germany, Peru in the late 1980s, Russia after 1999 — it almost trebled in the following five years, in the early stage of Vladimir Putin’s pre-eminence — or even the UK in 1975. UK stocks doubled that year, and trebled again by the end of the decade. How should investors deal with this? Getting out altogether when a market grows overheated is dangerous. You give up on the extra premium that the market normally gives you for taking the extra risk of buying stocks. And attempting to time the market based on valuation does not work. As Mr Goetzmann’s essays show, markets can easily grow even more overheated. I hate to repeat what I have said many times before, but rebalancing has much to be said for it. Steadily take profits each year as markets rise, and over time you will gain. In the long run, buying something that is obviously expensive seldom works out. Beyond that, remember that some booms do not go bust.
‘Financial Market History: Reflections on the Past for Investors Today’ by David Chambers and Elroy Dimson, CFA Institute Research Foundation; Amazon UK £31.94, Amazon US $38.95
Catherine Austin Fitts has a lovely post today about individual responsibility and how it is related to our world.
“Our task is to look at the world and see it whole.”
— E. F. Schumacher
“An entrepreneur who grew up on a small island once explained why small islands produced a much higher percentage of people who were good at starting and building successful businesses. He said it was because when a person grows up on a small island, you see how everything is connected. It is much easier to learn how to take responsibility for the whole — to see how all time and energy is precious and never to waste anything. People who grow up on small islands, he said, understand that “a penny saved is a penny earned.”
He had been taught from the time he was a small child to connect the behavior of individual people with how everything works around him. He said that he had learned to adjust his behavior so that it contributed to the system working in the way he hoped it would. His family, his school and his church all encouraged him to take responsibility for the whole in practical concrete ways. People who grow up on small islands, he said, understand that “what goes around comes around.”
My friend said that America is just a very big island, but most Americans do not know this — nor do they understand that the planet is also just an even bigger island. They cannot connect how the system works — particularly the aspects of the system they do not like — with their individual actions. They do not have even simple maps of how things connect. They do not understand their own power to vote with their thoughts, their choice of friends and spouse, their actions and how they spend their money every day. People who grow up on small islands, he said, “see the world whole.”
Most Americans look at our situation from their own individual points of view. From every degree of the circle, there is a different definition of what ails us, of why our system isn’t working, and what the solutions are. Often, what we perceive as our own individual problems are really just the symptoms each person experiences of the deeper problems that we all share. Too many times, the solution is to blame or attack someone, or to propose that more government or private capital be spent in a futile attempt to keep the wolf from the door. Without a simple map of where we are and how to get to a better place together, we have forgotten that we are in this together and at the simplest level, you simply can’t eat what you don’t grow.”
On a related note, Jason Brennan examines political behavior from a behavioral science standpoint.
Two Hypotheses about Political Participation
February 2017 – In Considerations on Representative Government, the great nineteenth century economist, philosopher, and early feminist John Stuart Mill advocated experimenting with more widespread political participation (Mill 1975). Mill hoped that participation would make citizens more concerned about the common good, and would entice them to educate themselves. He hoped getting factory workers to think about politics would be like getting fish to discover there is a world outside the ocean. As he said, “Among the foremost benefits of free government is that education of the intelligence and of the sentiments which is carried down to the very lowest ranks of the people when they are called to take a part in acts which directly affect the great interests of their country.” (Mill 1975, 304.)
20th century sociologist and economist Joseph Schumpeter tendered a grimmer hypothesis about how political involvement affects us: “The typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in away which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again.” (Schumpeter 1996, 262.)
Both Mill and Schumpeter were scientific thinkers, but neither quite had the data needed to test their hypotheses. However, we now possess over sixty years’ worth of detailed, varied, and rigorous empirical research in political science and political psychology. The test results are in. Overall, Schumpeter was largely right and Mill largely wrong. In general, political participation makes us mean and dumb. Emotion has a large role in explaining why.
Why It Matters
There are two major sets of reasons why bias-driven politics is dangerous.
First, it contributes to the growing political polarization in the United States. Americans have become more distrustful of each other on the basis of political differences. Legal theorist Cass Sunstein (2014) notes that in 1960, only about 4-5% of Republicans and Democrats said they would “displeased” if their children married members of the opposite party. Now about 49% of Republicans and 33% of Democrats admit they would be displeased (Sustein 2014, citing Iyengar, Sood, and Lelkes 2012). Sunstein says that explicit “partyism”—prejudice against people from a different political party—is now more common than explicit racism. In fact, it appears that “implicit” partyism is stronger than implicit racism too (cf. Iyengar and Westwood 2014).
For instance, political scientists Shanto Iyengar and Sean Westwood (2014) find that people are much more likely to discriminate against job candidates with different political viewpoints than they are to discriminate on the basis of racial differences. At least in some cases, for democracy to work, we need people to reach across the aisle, compromise, and work together. What the various biases discussed above tells us is that this is unlikely to happen.
Second, in a democracy, what we as a collective electorate believe about politics matters, even if what any individual voter beliefs does not. Individual voters do not matter at all, but voters as a whole matter a great deal. While many things—special interest lobbying, party politics, legislature preferences, bureaucratic autonomy, luck—influence and determine political outcomes, how voters vote makes a difference. Voters elect candidates with certain policy slants, and electing such candidates makes it more likely such policies will be enacted. Further, who makes it on the ballot in the first place is largely depends on what voters want.
But what voters want depends on what they know. Most citizens and voters have low levels of information; they are generally ignorant or misinformed (Somin 2013). But, it turns out, better informed voters have systematically different political beliefs from badly informed voters, and these differences in policy preferences are not explained by demographic factors, such as race, income, or gender (Althaus 2013). But, as this article has discussed, what voters know (or do not know) is not primarily guided by a dispassionate, reason-driven search for truth. Instead, our beliefs are largely determined by emotion-based biases.
In short, emotion-driven politics does not just make us biased. Rather, it makes us dislike each other and mistreat each other. It causes mutual distrust and diffidence. Further, it leads to us voting in ways that we would not vote if only we were better informed or if we processed political information in rational ways. Emotion-driven politics means we get worse political culture and worse government.
Syracuse schools are trying to diffuse behavior issues rather than just punish the students. They are doing it in response to racial disparity of punishment, but the solution will help all the students. Story from ThinkProgress.
In middle school, as my oldest kindly phrased it “they want to keep us safe from everything, so we can’t do anything.” My younger son was less generous in his characterization of middle school administration as “fascist Nazis.” In reality, they described the same culture of forced acquiescence.
In Syracuse, they are trying to teach the kids to resolve their issues in socially acceptable ways without punishment being the first action. They are also doing this in elementary school:
…a student, Josh, burst into the room. After the principal told him to close the door and knock, he came back in and said another student, Nathan, “was talking about my mom.”
“Nathan doesn’t know your mom and I will follow up with up him,” Reeve-Larham said.
“I’m going to punch him in the face!” Josh yelled, on the verge of crying.
“You’re not going to punch him in the face,” she said calmly before Josh slammed the door.
Although it may seem worrisome that one student said he wanted to hit another, the student only went to the principal’s office because she built a relationship with him and he trusts her. Josh anticipated that he would be angry and went to an adult for help.
My son did this in 8th grade. The response from the vice principal was, “Well, now we know you have a problem with him so if there is any issue between the two of you we will know it’s your fault.” That’s the difference between punishment culture and what Syracuse is calling “restorative practices.”
Not surprisingly, the middle school teachers are not at all happy with this new system, as they can no longer just send a kid away based on any infraction and not have to see them until (at least) the next day. They report feeling less safe, and feeling that the students no longer face consequences for misbehavior. That’s understandable, because it’s true, at least somewhat.
There’s a lot more to this, click the link.
the Surgery Center of Oklahoma, whose business model is different from that of most hospitals. There, the all-inclusive price for every operation is listed on the website.
In arriving at their price list, Smith and Lantier did an end run around the whole system. They asked their fellow doctors how much compensation was expected per procedure, factored in necessary expenses like surgical equipment and medical implants, then tacked on a 10% to 15% profit margin. Since their surgery center does not employ the army of administrators that is often required to haggle with insurers and follow up on Medicare reimbursements, their overhead is smaller. The whole operation is 41 people. “Finding an average price doesn’t require complicated math,” Smith says. “It’s arithmetic.” Since posting the price list eight years ago, they’ve adjusted it twice, both times to lower rates.
Never heard of this before. From NIH:
Multi-disciplinary research has revealed that electrically conductive contact of the human body with the surface of the Earth (grounding or earthing) produces intriguing effects on physiology and health. Such effects relate to inflammation, immune responses, wound healing, and prevention and treatment of chronic inflammatory and autoimmune diseases. The purpose of this report is two-fold: to 1) inform researchers about what appears to be a new perspective to the study of inflammation, and 2) alert researchers that the length of time and degree (resistance to ground) of grounding of experimental animals is an important but usually overlooked factor that can influence outcomes of studies of inflammation, wound healing, and tumorigenesis.
Grounding or earthing refers to direct skin contact with the surface of the Earth, such as with bare feet or hands, or with various grounding systems. … Various grounding systems are available that enable frequent contact with the Earth, such as while sleeping, sitting at a computer, or walking outdoors. These are simple conductive systems in the form of sheets, mats, wrist or ankle bands, adhesive patches that can be used inside the home or office, and footwear. These applications are connected to the Earth via a cord inserted into a grounded wall outlet or attached to a ground rod placed in the soil outside below a window. For the footwear applications, a conductive plug is positioned in the shoe sole at the ball of the foot, under the metatarsals, at the acupuncture point known as Kidney 1. From a practical standpoint, these methods offer a convenient and routine, user-friendly approach to grounding or earthing.
Maybe this explains why I love beach vacations so much.
Ken Rogoff’s new book “The War on Cash” details how wonderful it would be if cash was totally or nearly totally banned, with all transactions being made electronically. He thinks it would eliminate crime. I have stated this before, but you can’t eliminate crime by eliminating cash. Other forms of currency will be substituted, and this will have unintended and unforeseen consequences. Yes, it will drive up the price of crime, but it will certainly not stop it or probably even slow it down much.
Ron Rimkus, CFA, has a piece at Seeking Alpha that details the real motives behind this move, and the real harm it causes non-criminals, and he thinks about his mom as an example:
In short, … a cashless society would enable central banks to produce negative interest rates at any level.
If a -1% rate doesn’t do the trick, maybe -5% will. If -5% doesn’t cut it, perhaps -10% will. In fact, there would be no limit to how low negative rates could go.
In essence, a cashless society gives governments an extraordinary new power: the ability to tax wealth – including my mom’s, even though she is not “wealthy.”
In practice, if the world converted to a cashless society, Mom could still choose what she buys, how she invests, what she does with her money. But she would lose the freedom to withhold her money from the banking system.
What is best for savers is high interest rates. What is best for borrowers is low interest rates – or maybe the ability to default with little or no consequence. What is best for banks is having more transactions performed through the banking system via credit cards, debit cards, or other bank-sponsored payment methods. What is best for governments is for every transaction to be monitored and every possible tax dollar collected. What is best for central banks is to fully control the money supply so that they can create negative rates at will. What is best for politicians is to grow the economy regardless of how costly their policies are.
What is best for my mom is to be able to save her hard-earned money without it being unduly depleted by inflation, taxation, or bail-ins. And, maybe, to be able to opt into or out of the banking system by her choice.
So, there are specific and separate “hunt” and “kill” neurons? Each of those behaviors is complex, not simple. From FT:
The researchers at Yale University used “optogenetic” technology, which switches specific neurons on and off in genetically engineered animals with laser light, to tap into brain mechanisms that control predatory hunting.
By manipulating brain cells in this region through optogenetics, the Yale team found one distinct set of neurons controlled pursuit and another controlled the kill. If the hunting neurons were switched on and the biting set inactivated, the mice pursued prey but could not deliver the killer bite to finish it off.