Friday, August 2, 2013

‘Bubbles Forever’ and Stock Crashes Forever Too

Paul Farrell
Author and Yale economist Robert Shiller says “bubbles are essentially social-psychological phenomena, they are, by their very nature, difficult to control.” As a result, “public fear of bubbles may also enhance psychological contagion, fueling even more self-fulfilling prophecies.” So bubbles have a life of their own, and control the collective brain. Worse, “speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.”
In other words, America’s long bull rally that started when the bear bottomed in March 2009 could fool us again and again. It may continue long past the statistical average of a 4-year bull cycle, or terminate without warning tomorrow.
Factoring in the long build-ups before the 1999 crash and the 2008 crash, and the fact that major market moves in bull/bear cycles can only be predicted 25% of the time, and given the current massive global political uncertainties, Shiller’s description of the Roaring Twenties bull market, the 1929 crash and the multiple crashes during the Great Depression is probably the best plot line for the economic thriller in store for American investors from 2014 to 2020.
Shiller: “A major boom in real stock prices in the US after Black Tuesday brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash. Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.”
In short, hedge your bets.
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