Friday, Nov 06, 2009
It's an 'echo bubble'.
Newsweek: Boom and Gloom, New Market Bubble is Brewing
"An echo bubble. It's a term economists use to describe the smaller bubbles that follow on the heels of major ones, usually after the authorities helicopter in loads of cash to patch up the first round of damage, setting the stage for a second round of easy-money-driven speculation ... On average, they reach about 30 to 40 percent of the size of the original before bursting and sending market values back down to where they should have been all along ...This rally is not driven by giddy investors convinced they are grabbing a piece of the future, but by wary buyers trying to make back their losses, hoping to profit from a government-subsidized gravy train that they know will come to a halt sooner rather than later."
Posted by wanderinman @ 04:31 PM (838 views) Add Comment
3 Comments
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1. letthemfall said...
Interesting article. Support for the "return to normal" phase
2. clockslinger said...
...wiping out the gains of the echo but not generally dipping to the previous low...Which seems to suggest no return to the 2008 low of housing market and certainly not THE bubble graph we all seem to cling to so fondly on here. Seems to me that despite the redundancies and pay cuts our society has become so streched in terms of income and wealth there is always extra money around in the pockets of many to drive plenty of speculative activity with no impending crash as hoped for. I really don't think the inequality issue is adequately recognised in this country anymore...and it is the elephant in the room! The average self employed jobbing builder type who got in on a big scale in 1995 is pretty home and dry on BTL now and retired or scouting for more. Those who got a steady relatively low paid job and didn't borrow a lot will no doubt keep their house but end up in an equity release trap to fund health care in later years. It was all prefigured by Thatch in the eighties you young people! The enterprise society!
3. quiet guy said...
'While historical gaps in data make it tough to track perfectly, Shiller believes we have just seen the sharpest turnaround in American house prices in a century. British and Australian markets are starting to swing up, too ... How is it possible that home prices are going up again even as employment is going down in most parts of the world, wage growth is nonexistent, and public debt levels are reaching record highs? "We've just gotten very speculative in our behavior, and it's a change that will likely last. I'm inclined to say that we're seeing a new bubble," says Shiller.'
That's interesting and maybe makes some sense.
Argument against an 'echo' bubble: there doesn't appear to be much evidence for this in the past UK property peaks.
Argument for an 'echo' bubble: there is no precedent for 0.5% interest rates and QE.
If Schiller's observation about speculative behaviour is correct, we are entering a period of greater financial instability. Cash looks like a waste of time. Finding the next investment class spike in time to benefit is more diffiult and riskier than old fashioned saving.
'A skittish dip in a number of global markets last week signals that investors probably know all this at some gut level. If ever there has been a heavy bubble, devoid of lightheaded joy, this has to be it. This rally is not driven by giddy investors convinced they are grabbing a piece of the future, but by wary buyers trying to make back their losses, hoping to profit from a government-subsidized gravy train that they know will come to a halt sooner rather than later.'
That feels right for me.