{"id":1193,"date":"2013-05-18T18:23:32","date_gmt":"2013-05-18T22:23:32","guid":{"rendered":"http:\/\/blogs.darden.virginia.edu\/brunerblog\/?p=1193"},"modified":"2013-09-18T15:14:32","modified_gmt":"2013-09-18T19:14:32","slug":"a-new-bubble-what-new-era","status":"publish","type":"post","link":"https:\/\/blogs.darden.virginia.edu\/brunerblog\/2013\/05\/a-new-bubble-what-new-era\/","title":{"rendered":"A New Bubble? What New Era?"},"content":{"rendered":"

A<\/span>re the markets going mad? That is a question many investors might have asked in recent weeks, as stocks in the UK, eurozone and US have soared \u2013 even as bond spreads decline.<\/p>\n

* Gillian Tett, \u201cMarkets Insight: Phoney QE peace masks rising risk of instability<\/a>\u201d<\/p>\n

 <\/p>\n

The public discussion of bubble-like conditions in the financial markets is missing the forest for the trees. Gillian Tett and others focus on data patterns, index movements, and other market metrics while ignoring the larger question of what is driving this behavior. Her title implies that it\u2019s all about QE (quantitative easing) by central banks. The financial repression induced by QE is quite influential in the markets, but a \u201cbubble\u201d is motivated by much more, which I outlined in my just-previous post<\/a>. As the radio commentator, Paul Harvey, used to say, \u201cthere\u2019s the rest of the story.\u201d<\/p>\n

A key driver of a bubble is \u201cnew era\u201d thinking, the belief in a new paradigm, the conviction that the rules have changed permanently, in some fundamental way. As Sir John Templeton once said, \u201cThe four most dangerous words in investing are \u2018This time it\u2019s different.\u2019\u201d Those words prompted the title of the iconic book on financial crises<\/a> by Carmen Reinhart and Kenneth Rogoff.<\/p>\n

\u201cNew era\u201d thinking has preceded every one of the major market busts in recent memory. Leading up to the Panic of 2008 was the belief that housing prices could only rise and that demand for housing was practically unlimited. Leading up to the bust of 2001 was the Internet boom and the belief that new information technology would radically and rapidly change all business models (that may happen, but not at the speed believed in 1998-99). Financial crises of the 1990s in Russia, East Asia, and Latin America were brewed in visions of long-term rapid economic growth and the ability of those regions to handle massive inflows of \u201chot money.\u201d I could go on at some length, but you get the picture.<\/p>\n

If we are in the onset of a new \u201cbubble\u201d today, where is the \u201cnew era\u201d thinking, and on what is it predicated? Consider these possibilities:<\/p>\n

\u00b7 Shale gas, fracking, and permanently lower energy prices for the developed economies<\/span>. I can find no one who thinks this isn\u2019t a big deal. Some of the analyses I\u2019ve seen suggest that the economic impact of shale gas will be huge. But in the media it is hard to separate the rigorous analysis from the buoyancy and bloviation of \u201cnew era\u201d thinking .<\/p>\n

\u00b7 Austerity works<\/span>. Government actually reduces its debts and deficits without triggering revolutions or social unrest among the long-term unemployed and under-employed. Economies grow. Bondholders rejoice, as will Tea Partiers and Libertarians. This \u201cnew era\u201d vision could be a long shot, as Keynesians will be the first to argue. But some radio talk show hosts make it seem just around the corner.<\/p>\n

\u00b7 New technology redux<\/span>. Last week, I heard Jeffrey Immelt, CEO of GE, extoll the rise of the Industrial Internet<\/a>, in which machines talking to one another will dramatically improve manufacturing efficiency and profitability. For instance, he says that such improvements have reduced the labor content of GE\u2019s jet engines to only 5% of the total cost per engine. In Immelt\u2019s view, enhancements in new technology will drive manufacturing back to America. This may be good for corporate profits, but what about employment and consumer spending?<\/p>\n

And if you hang around a university long enough, you\u2019ll hear late-night student bull sessions spin out many more possibilities. The three \u201cnew era\u201d visions I mentioned are plausible; over time, any one of them could <\/i>turn out to be true. But they sure warrant critical reflection. As Yogi Berra said, \u201cIt\u2019s tough to make predictions, especially about the future.\u201d<\/p>\n

Critical reflection on the \u201cnew era\u201d sentiments is how analysts and pundits could usefully shed some light. In particular, four dimensions beg for attention:<\/p>\n

\u00b7 Profitability. Bigger is not better. Better <\/i>is better. The realization of more economic activity is useless if it does not generate benefits in excess of the costs to produce those benefits. How profitable will be the \u201cnew era\u201d?<\/p>\n

\u00b7 Timing. How soon will the net benefits of the \u201cnew era\u201d arrive? How long will those benefits last?<\/p>\n

\u00b7 Growth. Will the net benefits change over time? With they grow? Will they decay? How fast?<\/p>\n

\u00b7 Investment. What\u2019s the outlay necessary to realize this future?<\/p>\n

These four factors are the underpinning for valuing just about any asset and should prompt a host of probing questions about any of the \u201cnew era\u201d scenarios.<\/p>\n

In my experience, it is good questions, rather than fervent opinions, that mark the successful investor. I don\u2019t think that the popular conversation is asking enough questions about the fundamentals that might possibly underpin the current market conditions.<\/p>\n

Whether we\u2019re in the early stage of a bubble or not, investors are well-served by critical thinking about firms and market conditions. You\u2019ll find plenty of it at the forthcoming University of Virginia Investing Conference<\/a>, November 14-15, 2013 at Darden. The theme of the conference is \u201cFinding Opportunity in an Unpredictable World.\u201d We already have a line-up of impressive speakers and stimulating sessions. Mark your calendar.<\/p>\n","protected":false},"excerpt":{"rendered":"

Are the markets going mad? That is a question many investors might have asked in recent weeks, as stocks in the UK, eurozone and US have soared \u2013 even as bond spreads decline. * Gillian Tett, \u201cMarkets Insight: Phoney QE peace masks rising risk of instability\u201d   The public discussion of bubble-like conditions in the […]<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[58345],"tags":[],"class_list":["post-1193","post","type-post","status-publish","format-standard","hentry","category-economic-crisis"],"acf":[],"yoast_head":"\nA New Bubble? What New Era? - Robert F. Bruner<\/title>\n<meta name=\"description\" content=\"May 18, 2013 - Are the markets going mad? 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