I am currently working on a Grand Unified Theory of asset and commodity price bubbles.
I'm not going to give anything away as yet, but I'd be grateful if readers could leave examples of recent price bubbles (let's say the last twenty years) in the comments, as there well may be some that don't fit my current theory and which I may have overlooked - it's difficult to avoid selectively choosing examples that fit the theory, whereas the scientific approach is to look at all the facts first and then test the theory.
Thanks in advance.
Big Green Bills
53 minutes ago
33 comments:
I'm fairly sure that Netscape shares count as bubbles "buying them because some other fool will take them off me", and maybe some of the current Web 2.0 companies.
2 property bubbles.
Coke prices after the great Spanish police Marbella marina drug bust 1999.
Good stuff, but I've covered VW shares and heroin prices, so that would be retreading old ground.
Keep 'em coming.
House prices are obvious, but rent prices also saw a bubble for domestic rents (even if data for 2004-2006 appears to be missing).
I did some calculations yesterday on this actually. It looks like domestic rental prices actually went up as a percentage of house prices during the recent bubble, although those missing years make it incomplete.
It does suggest that rents experienced a greater bubble than house prices however if they went up as a percentage when house prices were already bubbling.
Doesn't appear to be the case for business rents however as you yourself have shown.
I can send you the graphs and data if you like.
I'm afraid I haven't lived long enough to remember many others! There may have been one in Russia straight after the collapse of the USSR however - not sure exactly what.
Anton, ta, but I'd hotly dispute there having been a rent bubble. Rents increase in line with average wages (I've been saying this for twenty years), seehere.
MW, I think you should look at the word adiabatic.
here's one you probably don't know about: UK forward gas prices, 2005
(there was also a spike in the gas forwards in Sept '04, but that wasn't a bubble)
if I think of any more I'll be back
ND, correct, I didn't. What was behind that?
Have you been to the Mises Institute? Lots of good stuff on money and bubbles.
Meanwhile what about classic cars in the '80's?
L, 'money' ain't important (well, it is to an individual who has lots, but not to the economy as a whole, being a zero-sum game), it's just a way of measuring much more important things.
I know nothing about classic car prices in the 1980s. What was behind that?
I shall try to be brief
in 2004, a most unusual event occurred: a dramatic (and very harmful) spike in the UK gas forwards (spot prices often spike, when bad weather strikes etc etc, but forwards shouldn't): but it was a true spike, and lasted only a few days
starting early in 1Q 05, the forward price of winter gas ('05-06 delivery) started to rise inexorably (and with no obvious 'fundamental' reason), to sustained, extraordinary, unprecedented levels (about 4 times higher than the highest ever sustained winter spot price, and much higher even than the spike of the previous year, which lasted all of 5 days). This '05 rise was not a spike - it was slow and steady
then in July '05 the price collapsed over a 3-day period back to 'normal' levels, where it more-or-less stayed
my interpretation
the spike in the forwards in '04 had caught the attention of commodity punters worldwide, and many hedge funds came to the UK, thinking if it happens once it can happen again. Of course, none of them would ever dream of taking physical delivery of the gas ! It was a pure forward play: forward prices have little or nothing to do with forecast spot prices, & all they cared about was the possibility of another spike during the period the forward contract was open. So they turned up in the UK market, went long (at prices much lower than the peak of the '04 spike), and settled in for the ride.
lots of buying interest: so the price rises gently but steadily, not spiking at all; so they pile in some more. Lot's more of the buggers arriving from all corners of the globe
curiously (!), they found sellers amongst the ranks of the well-established locals (for once, the Brits fleecing johnny hedge-fund): remember the old saying
when the man with money meets the man with experience, the man with money gets some experience
and it ramped and it ramped, to the bizarre levels noted above ... until one day in July '05 someone noticed that the king had no clothes, and down it went, into the hands of all the locals who'd shorted the hell out of it
by the time it had surpassed the previous-year's spike price, there probably wasn't a single UK player who thought it was for real, and were all sitting it out, if not shorting it. Some of the smarter hedgies who were first on the scene probably did as well as they'd hoped; but the latecomers were in full tulip-mania mode, and got stuffed
Was about to suggest the art market which has managed to stay inflated. Then glanced at the Times and noticed:
Going going gone.
"Christie's, Britain's oldest auction house, is to let up to a quarter of its 800 London-based staff go as the fine art market reels from the effects of the credit crisis."
Special conditions apply here; a small number of big players at the top of the market have produced odd effects which out-perform nearly all other holdings.
The contemporary* market has the same odd effects but there collectors such as Anita Zabludowicz, Elton John and Charles Saatchi buy the most amazing amount of tat and hope that some of it turns out to be the sort of art which they might sell at Christie's eventually.
The Times story sets last year's Lucien Freud as the high-water mark.
* I can never remember which way round is which. 'Modern' I think means: 'possibly of some artistic merit, preferably with the painter dead and the work in stable materials' e.g. Rothko, while 'contemporary' means: could be a pile of poo and will be if Ofily or Koh have anything to do with it, and the artist is still alive as the public haven't got their hands on their throats yet.
Sorry - Ofili, not Ofily
Are you only concerned with modern bubbles?
If not, then there was the one for gold that occurred after the discovery of the New World, particularly in Spain.
It then spread to the Ottoman Empire by the mid 16th Century, manifesting itself as "spreading inflation" when the bubble burst.
There was of course the South Sea bubble as well.
Lola,
Yes, I remember the classic car boom of the late 80s. Clapped out old E-Types going for stupid amounts of money.
Mark, 1980's classic car market.
I've been around historic motor racing for yonks. From as far ago as I can remember and seriously from the early '80's when I started racing you could pick up something vaguely historic (LOtus 6, Elan, Diva, Elva, Ginetta G4 various Alphas etc etc)to race at sensible money. But genuine cars with provenance are in finite supply. Some cars have high intrinsic value, D Type Jags, GT40's for example.
Operators (like for example, John Foulson of Atlantic Computer Leasing infamy) brought ever more money into what is essentially amateur racing and bid up the prices of 'significant' cars. Then everyone started to believe that anything vaguely 'historic' was intrinsically valuable and because cheap money was available many purchases were financed. Cars like tatty old E Types, common or garden Lotus Elans etc etc were bid up and up by internal speculation, until the bubble burst (with the property bubble) in 1989. Prices dropped back and have not really recovered for non-exclusive cars like E Types. On the other cars of real significance like D Types and GT 40's (and Lola T70's) have have continued to attract high prices.
The bubble has much in common with housing in that what I describe as commodity houses - 2 and 3 bed semis and terraced of which there are millions - are bid up in the momentum of the market to a price far in excess of their 'value', whereas properties of real worth in good locations are far less volatile.
The classic car bubble had much in common with the Dutch Tulip buld mania.
Over recent years much the same thing has happened for the same reasons - money too cheap and too plentiful - encouraging speculation.
And note very carefully, I can categorically state that historic racing cars are not in any way an asset. If you define asset as something that puts money in your pocket every day, then historic racing cars are the complete antithesis of that! Mind you only in the UK are historic cars actualy 'raced'. Elsewhere in the world they are usually driven at less than racing speeds. Foreign owners seem more concerned with the ownership and demonstration of their 'asset'.
TA, WOAR and L, thanks that is most helpful. Those are straighforward asset/credit price bubbles that seem to follow the same rules as housing - i.e. credit is cheap and supply is limited (there was no bubble in common or garden new car prices because millions of new ones are made every year).
ND, excellent anecdotal, but you're the Energy Minister, not me, if you don't know what originally sparked off the 2005 forward bubble (we know what kept it going, that's the easy bit) then it's difficult to categorise and neither proves nor disproves my theory.
oh, but I do
shall await your grand theory and then compare notes
Think of all those reputational bubbles that rise up on a flow of cheap credit.
Don't include the Tulip mania.The dealers had expectations that they could reproduce lots of new bulbs from the few prized specimens, so they were expecting prices per bulb to go down eventually. So not the inflationary mentality.
Mind you some people say the Tulip mania put paid to Dutch expansionism and is the reason they don't speak Dutch in New York (formerly New Amsterdam)
What about the rising price of footballers - does that count?
The comic book collecting bubble. Good wiki[pedia article here http://en.wikipedia.org/wiki/Comic_book_collecting#The_speculator_boom
It is almost a textbook example since the market was extremely free of government; the customers being largely young were particularly credulous that a straight line multiplication of the rate of price increase of 1960s comics would allow them all to retire at 40; ordering functioned very like the futures market with a 2 month lead time; & the publishers behaved with a venality & short term greed almost unparalleled. It had the unusual quality that comics published last month could not increase their supply with increased demand whereas next month's comics could do so almost infinitely.
The long term result was a major fall in comic sales but this was made worse in terms of comics sales by the fact that graphic albums were becoming available - but this also made it better in that the number of graphic stories read declined only slightly it is just that they sold in the new format.
What about the fine art market in the 80's. I eem to remember pension funds like the Coal Board one getting involved. Art? And 'investment'. Oh Gawd. Tell me, what yield does art have to pay a pension?
...and wasn't there a huge commercial property bubble in the mid 70's that eventually precipitated a crisis in what were then referred to as secondary banks? The name Slater Walker rings a bell.
Cabbage Patch Dolls? Or am I now getting silly?
'Course, you know the answer to your theory already. It's 42.
DBC, tulips are in there - the government changed the contractual terms.
WOAR, no that's a free market thing.
NC, that's a bit obscure.
L, investment in art and investment properties in 1970s and possibly 1980s was a response to high taxation of income and high inflation, so people went for physical assets, that's a secondary thing.
Art, yes, I can see that as a way of escaping confiscatory taxes on 'true' investment in the 70's. But from memory the secondar banking crisis was precipitated by a bubble in debt and property caused by poor policy.
L, "the ... banking crisis was precipitated by a bubble in debt and property caused by poor policy"
A bit like now, in other words?
Don't buy Tulips as a bubble asset.
They reproduce vegetatively,so there is no point in hanging onto valuable bulb: you have to plant it
( in Autumn I expect)and will get several bulblets on the outside next year which will bring the price down.The supply of bulbs will expand exponentially year on year.Houses are not bought to reproduce themselves.There must be some difference between a collectible asset and a productive asset.
Mark
Don't dismiss Neil Craig. On a blog that is full of interest, that is the especially interesting to someone like me who loved reading comics from the 1960's through the 1990's and then wondered where they had disappeared to and why they had gone up in price. If your theory of bubbles can explain such obscure phenomena as well as larger scale price movements, more power to it.
TG, I don't dismiss anything that Neil says, but his comic book example boils down to the comic book industry tricking collectors into thinking that the comics they were churning out would have scarcity value in the future - I am surprised that the bubble lasted as long as it did.
I am concentrating on the Big Bubbles which require governments to restrict supply or stoke demand, for whatever reason.
The publishers didn't create the bubble, that was the customers, though they did exploit it to the hilt. I think manufactuers may well have created the cabbage patch doll & buzz lightyear bubbles & certainly have deliberately ensured the scarcity of certain trading cards.
I think small bubbles are worth investigating since, being simpler & easier to see all of the rules may be more easily observed. In the same way that Mendel derived the rules of genetics from sweet peas rather than cattle.
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