My knowledge is rather limited when it comes to economics but could anyone briefly summarize why or how you can even identify an economic bubble? What is the centralized theme of the 'bubble' people speculate that we are in right now.
Is red line I drew using common sense supposed to be the 'actual' steady economic growth and what it 'should' be?
How can the economy overall still be positively ascending, after a certain point wont it level off and there cannot be anymore economic growth, what happens in the end? do we explode or what
Oh and I forgot to mention in the OP.
Why is it since around 1995 there have be large amounts of artificial exponential growth in the economy, is it because technology provides us with ways to give artificial growth which then was corrected in the 2007/08 financial crisis
That chart is misleading. Everything spiked in the 90s because the internet became a worldwide commodity and opened entirely new levels of worldwirde commerce, especially for the US who was using it to abuse poorer nations and get rich (not a bad thing). The crash that then happened wasn't a correction so much as a loss in confidence when it was realized that big players were being total fuckups. That's why it recovered so strongly and so quickly, it was an overcorrection.
For the crash when you say big players were being total fuckups, what do you exactly mean by this, from what I understand a recession occurs when people just spend more than they can earn is essence.
Is the fall were experiencing now an indicator for a recession/
Every sustained market downturn, current one is down 10% since May, precedes a global recession.
The question is will it be a big one?
I don't think so for America. But it could lead to a serious drop in the equity markets and junk bond markets.
1. You're correct about recessions
2. Major banks gave out huge loans to idiots who couldn't afford them, then essentially used financial wizardry to fuck that up. Combine that with "bail outs" (something that doesn't exist in actual capitalism), and you've got a sudden realization from the general population that the people in charge do not know how to maintain a sustainable financial system.
3. We are indeed entering a recession, but it has very, very little to do with the overvalue of stocks. It's more because of stagnant wages. Remember how most people made 40k-50k in the 90s? Most people still make that much today (averaging out), and it's been 20 fucking years. The average salary should be 60-80k by now; I'm at 81k and after paying off student loans I'm still not looking at a proper housing situation until 30.
That doesn't include reinvested dividends either. Please stop with the 25 years myth.
sp500 includes dividends. the dow people always look does not.
dow total includes.
Is there any way of knowing how big it will be, or is it hard to really find out.
One other thing ive noticed which is strange is the concept of countries being in debt to the point where no one can pay their lenders back, I mean I could understand if you borrowed 1 billion dollars or something, but america owes china trillions of dollars seems kind of fuckign retarded if you ask me, and other countries which owe more than their gdp can produce, what is the explanation behind this
Nobel award winning economist Fama demonstrated that while every /biz/raelite and their goat likes to try to predict bubbles, the actual empirical evidence shows that nobody does it consistently and timely enough to make a profit from it. Therefore it is a futile exercise and has no financial value. Best to just Dollar Cost Average and say "Goddamn the torpedoes!". But that advice only helps if a person is logical and mathematically and statistically literate. So I may as well have just spent 2 minutes posting rate-my-dick pics on /b/ instead of typing this on /biz/
There have been all kinds of clowns winning nobel prize in history. Fama does not excactly appear as not the sharpest pencil in the drawer.
He wrote about the efficient market theory back in vietnam war times or something. So clearly he had no clue what he was talking about cause the markets where anything but efficient those times. Jesus, you got the fucking paper on your hands when you bought stocks.
>countries being in debt to the point where no one can pay their lenders back
Actually, if you own your own currency(al la, USA or China) then you have unlimited potential to pay back by printing. It's only when your country's currency is fixed to something like the Euro(Greece), is when you're really screwed.
The chart shows the amount of borrowed money invested to raise stock prices over the longish term, since 1995 (the internet era).
Over the 1999-2003 bear market, 200 percentage points of margin debt burnoff resulted in a price drop from 1506 to 828. About 45%.
In 2007-2009's bear, 250 percentage points of margin debt burn dropped price from 1561 to 683. About 56%
To get to even at 100% margin debt today would require a burn of 300 percentage points of margin. If each 50 points of margin adds an extra 10 points of price percentage, as in the last two bears, then 300 margin points from 2130 would require a drop of 65%, putting a bottom here at S&P 746.
That would be a crash.
Yeah. And look at the big picture of that. How many people remember March 2009 and kick themselves.
It's almost like this kind of volatility cycle has been given intent. As if the market moving participants have discovered a brand new game. The 10 year money bellows. inhale for 7 years, exhale for 3.
To answer your point about growing an ecomony forever, it is certainly possible and sustainable. I'll give a simple example:
>a Ford Focus and a Lexus LS are both safe reliable means of transportation
>in terms of raw materials, both represent approximately 3 tons of metal, glass, plastic, rubber, etc.
>a new Ford Focus in Canada has about $17k CAD of economic value
>a new Lexus LS in Canada has about $93k CAD of economic value
>a Lexus does not consume 5.5 times the raw materials, or energy to produce. It does not produce 5.5 times more carbon in the manufacturing or operation of the vehicle
>the 550% premium in value is derived from technological superiority and marketing primarily.
>just about everything you currently consume can be improved in similar ways
People who doomsay about unsustainable growth don't understand this most basic of truths.
It's the same fucking car as a shitty Toyota with a different interior, different logo, and massive price markup slapped across it. It's literally just Toyota price gouging.
It's not a crash, just a sale where you can pick-up discounted shares.
I suspect it was caused by the end of the era of government intervention into markets. I mean the US Fed stopped it's bond buy-back program last year which injected trillions of dollars into corporations.
Was there an explanation for the August dip, what were people saying then vs what actually happened, just curious.
Well since the drops are pretty much identical now I guess we'll see what is really happening within a few months
Alright OP. I'm going to give you the actual answer.
To identify a bubble the Fed uses what's called the St. Louis financial stress indices. Basically when the graph is below zero, it means we're in a bubble. If it's higher than or equal to zero we are not in a bubble. According to this graph we are in a bubble. BUT (see next post)
If we take a look at the BAA-Treasury spread, we can see that investors (who are normally better at forecasting than the Fed) believe that we are not in a bubble and continue to buy junk bonds rather than safer US treasuries. I expect this to change however due to the volatility of the current markets.
So there you have it OP. We are not in a bubble for the financial market. In regards to the economic markets, we are certainly in a bubble. If China dumps it's treasury bills or let's them mature, that could pose a problem for the US in paying back debt. But don't expect that to happen anytime soon, and even if it did, other outside investors would simply buy the available bonds from China. However, if global markets crash our net exports will be severely affected. SO hope that China doesn't going any further into a recession. The Fed doesn't believe this will happen (indicated by the rate hike), but they've been wrong before.
Oh I forgot to mention. It is also worth pointing out that even if there was excess risk in the financial markets, the Dodd-Frank Bill created a new institution, the Financial Stability Oversight Council, and introduced new means of monitoring risk, like stress tests. Any excess risk is being countered by the presence of a much more intensive and macroprudentially effective system of oversight and control. The market is much more regulated than it was before.