Wednesday, September 21, 2011

‘A bubble is a bull market in which you don’t have a position’.

The most dangerous bubble of all

There's nothing so frustrating as seeing someone of undoubtedly inferior intelligence earn fortunes while you're sat on the sidelines. So you declare his market a bubble. The UK and US government bond markets are both, very much, 'bull markets in which I don't have a position'. But are developed government bond markets in a bubble? Let's use King, Smith, Williams and Van Boening's 1993 definition: a bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values".

Posted by general congreve @ 12:28 PM (1411 views)
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4 thoughts on “‘A bubble is a bull market in which you don’t have a position’.

  • ‘Intrinsic value’ is a tough one to define since it might include projected earnings and projected earnings can be affected by a lot of things – including faith in the value of the market itself.

    Today, I read that a women’s marathon record is no longer a world record because basing it on purely ‘who has run the fastest ever’ is confusing and unfair. This makes me think that maybe society has shifted into a new paradigm where you can sput nonsense and it’s universally accepted without much resistance. These are scary times.

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  • The author asks how the government gets away with paying 2% interest when inflation is 5%.

    He is looking at it all wrong. The basic rule for banks is “loans create deposits” and the same is true for governments “spending minus tax revenues creates debts”.

    To cut a long story, if you’re a quangocrat or a corporatist and your chums in the government ask you to do some highly important consultancy work for £1 million, you’d accept the offer. They tell you that they can’t pay you in cash, but would £1 million in gilts, redeemable in ten years’ time be OK. You say yes of course, but maybe you bump up the price to £1.4 million to cover your inflation loss. You then appoint your chum in government as a director of your company, bung him £100,000 “emoluments” and everybody’s happy.

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  • general congreve says:

    @2 – Of course, we would all do the same. Can’t see how anything could go wrong.

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  • The FOMC has tonight blown this bubble up some more… popping time soon?

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