QuoteOriginally posted by: KackToodlesQuoteOriginally posted by: FermionNevertheless, you'll be pleased to know I do have plans to get rich shortly. When you prove your theories are correct by using them to get rich, let me know and I'll be the first to buy you a beer. Until then, your theories are just that: unproven theories, and UTs in finance are usually wrong. Your if-rich-then-true theory, witnesses lack of knowledge about evolution. There are other fit-for-purpose functions, especially in evolution of cooperation. And also selection and mutation was an overkill for a getting-a-free-beer chance ?

Fermion,You claim that the price charts are evidence of bubbles and I claim that they are evidence of at least 3 other causal (nonbubble) phenomena: (1) skew leptokurtic exogenous shocks (e.g., hurricanes), 2) skew leptokurtic information production in innovation processes (e.g., busted blockbuster drugs), 3) the intrinsic fragility of complex optimized systems (i.e., the statistics of incremental success modes vs. incremental failure modes). In all three of these alternatives, the market price is, at all times, the fair, reasonable-risk-premium reflection of future value and yet the price returns will be skew leptokurtic on a range of timescales. Thus we have a total of at least four different phenomena ( I can think of at least 3 others, but why muddy the picture even further) that all produce the same price chart (i.e., steady price increases with occasional sharp declines) cited in the Madelbrot + Taleb article. It's not that any of the four are inconsistent with any of the other three (a mix of all four can occur), but that the price chart structure doesn't tell us which of the four are occurring and to conclude that one of the four operates "95%" of the time is to use abductive logic.My second line of reasoning is to consider the counterfactual world of intentional bubble production and ask "how would fraudulent bubble makers act?" If Lehman, Bear, HFs, Ivy endowments, etc. (i.e., the smart money) had intentionally created a fraudulent bubble, why were they so stupid in their hedging and exit strategies? If Benanke and Paulson knew they were creating an intentional and fraudulent asset price bubble, why did they flounder so badly when it popped? I'm not very smart and yet I would have been a much smarter bubble-fraud evil mastermind than these smart money masters of the universe. Thus the empirical effects are inconsistent with the hypothetical causes. That is it looks like the smart money didn't know it was involved in a bubble. I also look at who gained the most in all this economic cycle relative to a bubble-free version of the economy. What I see is that trillions of dollars moved from rich investors to poor no-downpayment borrowers who then bought big houses, big cars and closets full of consumer goods that those poor folk could never ever have afforded without the largesse of foolish "smart money" investors. And when the bubble popped, it was the "smart money" investors (e.g., banks, HF, Ivies, etc.) that were left holding the toxic asset bag. (Even if the "taxpayers" cover most of the investor's losses, it's still the rich that pay because U.S tax revenues are so overwhelmingly drawn from the rich). This shows the same pattern as in the Great Depression -- the "smart money" rich lost disproportionally more of their wealth and income than did the poor. Based on that, a conspiracy theorist (which I'm not) would say it looks like the poor fleeced the rich in 1929 and in 2007. At this point, the non-ideological person would not be able to say if the rich created the bubble or the poor created the bubble. That leads to a third possibility -- and one that is the heart of this chaos thread -- that no one intentionally created this bubble but that bubbles arise spontaneously in distributed networks of adaptive economic agents. This third hypothesis for the cause of bubbles has support from behavioral finance and from more abstract studies of agent ecologies.You claim that "bubble creation depends on speculation of future market value (not any objective asset value)" and that's false. That is, if you study bubbles you find plausible contemporaneous rationale for the high intrinsic valuations of the bubble-asset. In the late 1990s, a great many people provided rationale for why the dotcom companies really were going to take over the economy. (BTW, I notice that AMZN and EBAY are both near their dotcom highs so perhaps those stocks weren't in a bubble during the dotcom bubble). During the 2000s, the growing sizes of houses, increasing domestic amenities, and demographic changes seemed to justify both housing's higher asset prices and higher fractions of household income. A related and confounding factor is the extreme sensitivity of NPV price expectations to uncertainties about high growth rates, especially in an era of low risk-free interest rates. This numerical instability of NPV is a 5th cause for bubble-like price patterns in a nonbubble market. The point is that the bubbly prices are not entirely implausible even if they are out of proportion with historic values.

QuoteOriginally posted by: Traden4AlphaFermion,You claim that the price charts are evidence of bubbles and I claim that they are evidence of at least 3 other causal (nonbubble) phenomena: (1) skew leptokurtic exogenous shocks (e.g., hurricanes), 2) skew leptokurtic information production in innovation processes (e.g., busted blockbuster drugs), 3) the intrinsic fragility of complex optimized systems (i.e., the statistics of incremental success modes vs. incremental failure modes). In all three of these alternatives, the market price is, at all times, the fair, reasonable-risk-premium reflection of future value and yet the price returns will be skew leptokurtic on a range of timescales. Thus we have a total of at least four different phenomena ( I can think of at least 3 others, but why muddy the picture even further) that all produce the same price chart (i.e., steady price increases with occasional sharp declines) cited in the Madelbrot + Taleb article. It's not that any of the four are inconsistent with any of the other three (a mix of all four can occur), but that the price chart structure doesn't tell us which of the four are occurring and to conclude that one of the four operates "95%" of the time is to use abductive logic.I have no problem with your three mechanisms. They are just irrelevant to my argument -- which is that deliberate bubble creation is going on on top of those three.QuoteMy second line of reasoning is to consider the counterfactual world of intentional bubble production and ask "how would fraudulent bubble makers act?"Just like they did act.QuoteIf Lehman, Bear, HFs, Ivy endowments, etc. (i.e., the smart money) had intentionally created a fraudulent bubble, why were they so stupid in their hedging and exit strategies?People are stupid for all sorts of reasons -- even fraudstersQuoteIf Benanke and Paulson knew they were creating an intentional and fraudulent asset price bubble, why did they flounder so badly when it popped? I'm not very smart and yet I would have been a much smarter bubble-fraud evil mastermind than these smart money masters of the universe. Thus the empirical effects are inconsistent with the hypothetical causes. That is it looks like the smart money didn't know it was involved in a bubble.No. Just like any other moderately smart person, they knew the bubble would bust -- they just, like most other reasonably smart people -- didn't know when. But, just like in many previous bubbles and mini-bubbles-in-bigger-bubbles they expected, through appropriate hedging and privileged access to the market, to still be in profit when the bust occurred and to maximise that profit the longer the bubble continued to bubble up.QuoteI also look at who gained the most in all this economic cycle relative to a bubble-free version of the economy.An impossible task since no one knows what a bubble-free economy would have looked like -- even after the fact.QuoteWhat I see is that trillions of dollars moved from rich investorsAnd from workers' pensions and house buyers who suddenly found themselves with negative equity.QuoteYou claim that "bubble creation depends on speculation of future market value (not any objective asset value)" and that's false.No it's not.QuoteThat is, if you study bubbles you find plausible contemporaneous rationale for the high intrinsic valuations of the bubble-asset.Such rationales are easy. They are part of the marketing of the bubble. Pump-and-dump is alive and well.QuoteIn the late 1990s, a great many people provided rationale for why the dotcom companies really were going to take over the economy.(BTW, I notice that AMZN and EBAY are both near their dotcom highs so perhaps those stocks weren't in a bubble during the dotcom bubble). During the 2000s, the growing sizes of houses, increasing domestic amenities, and demographic changes seemed to justify both housing's higher asset prices and higher fractions of household income. A related and confounding factor is the extreme sensitivity of NPV price expectations to uncertainties about high growth rates, especially in an era of low risk-free interest rates. This numerical instability of NPV is a 5th cause for bubble-like price patternsIgnoring the speculation you put in parentheses, thanks for making my case.Quote in a nonbubble market.Where will you find one of those?Quote The point is that the bubbly prices are not entirely implausible even if they are out of proportion with historic values.Historic values are also bubbly.

QuoteOriginally posted by: FermionQuoteOriginally posted by: Traden4AlphaFermion,You claim that the price charts are evidence of bubbles and I claim that they are evidence of at least 3 other causal (nonbubble) phenomena: (1) skew leptokurtic exogenous shocks (e.g., hurricanes), 2) skew leptokurtic information production in innovation processes (e.g., busted blockbuster drugs), 3) the intrinsic fragility of complex optimized systems (i.e., the statistics of incremental success modes vs. incremental failure modes).I have no problem with your three mechanisms. They are just irrelevant to my argument -- which is that deliberate bubble creation is going on on top of those three.There's no doubt that all four (and more) phenomena occur on top of each other. But you made specific and unbacked claims that one of the four is 95% (now backpedaled to a subjective "most of the time by far") of the market behavior. Other than ideological bluster, you've provided no data to support that more the epsilon % of the market price variation is due to your favorite cause of skew leptokurtic returns instead of any of the other causes of the same price chart patterns.QuoteQuoteIf Benanke and Paulson knew they were creating an intentional and fraudulent asset price bubble, why did they flounder so badly when it popped? I'm not very smart and yet I would have been a much smarter bubble-fraud evil mastermind than these smart money masters of the universe. Thus the empirical effects are inconsistent with the hypothetical causes. That is it looks like the smart money didn't know it was involved in a bubble.No. Just like any other moderately smart person, they knew the bubble would bust -- they just, like most other reasonably smart people -- didn't know when. And yet any study of bubbles would lead to a useful estimate of the relationship between duration-of-bubble, amplitude-to-peak, and depth-of-crash (especially if bubbles are as prevalent as you claim). Moreover, a true bubble creator would pick the time of it's bursting. How can you assert that they control bubbles and crashes and assert they don't know when bubbles and crashes happen? You claim its pump-n-dump and yet it can't be that because the alleged fraudsters never dumped, they held and cratered (they're still holding!). Are your really claiming that the smart money was dumber than a teenage online pennystock huckster?QuoteQuoteI also look at who gained the most in all this economic cycle relative to a bubble-free version of the economy.An impossible task since no one knows what a bubble-free economy would have looked like -- even after the fact.Not at all. Three nearly independent lines of evidence allow the reconstruction of the economy without the housing bubble. First, it's extraordinarily easy to retest the underwriting criteria for mortgages and estimate the % of people that should never have been given the extra cash or the McMansion houses (i.e, subtract out the subprime mortgages). Second, one can tap data on the growth of the consumer debt and decline in home equity relative to historic a values to get a second estimate of the wealth transfer created by loose lending and the housing bubble. Finally, a third line of data are longitudinal studies of states with more and less of a housing bubble (e.g., contrasting Nevada with Vermont). Add in basic economic analyses for price elasticity, patterns of household spending, and employment patterns and it's not hard for a competent economist to estimate what the U.S. economy would have looked like had rich people not thrown a lot of free mortgage money at poor people to buy houses.QuoteQuoteWhat I see is that trillions of dollars moved from rich investorsAnd from workers' pensions and house buyers who suddenly found themselves with negative equity.Most of the negative equity cases represent cases in which the person had no equity to begin with. If you don't believe me, then go look at the data (if you dare). In fact, a large fraction of the negative equity cases represent cash-out refis -- consumers exchanged now-worthless home equity for money from investors and consumers spent it. Moreover, if you look at the delays in the foreclosure process, a fair number of folk have enjoyed months of free rent because they've stopped paying the mortgage but haven't been kicked out. In other words, subprime consumers lost nothing, spent profligately, and lived for free in big new houses they never would have had if mortgages had required significant downpayments and proof of sufficient income. Who fleeced whom? LOL!

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: FermionQuoteOriginally posted by: Traden4AlphaFermion,You claim that the price charts are evidence of bubbles and I claim that they are evidence of at least 3 other causal (nonbubble) phenomena: (1) skew leptokurtic exogenous shocks (e.g., hurricanes), 2) skew leptokurtic information production in innovation processes (e.g., busted blockbuster drugs), 3) the intrinsic fragility of complex optimized systems (i.e., the statistics of incremental success modes vs. incremental failure modes).I have no problem with your three mechanisms. They are just irrelevant to my argument -- which is that deliberate bubble creation is going on on top of those three.There's no doubt that all four (and more) phenomena occur on top of each other. But you made specific and unbacked claims that one of the four is 95% (now backpedaled to a subjective "most of the time by far") of the market behavior.My argument is that deliberate bubble creation is almost always there in the market and its only not evident during a bust. I make no attempt to quantify it in terms of market movement. It was always intended as a time statement. I make no other claim than that. Now that you've agreed that deliberate bubble creation is going on, how much of the time would you think that is true? Do you think the bubble creators take a holiday most of the time or do you think they are at work?Quote Other than ideological bluster, you've provided no data to support that more the epsilon % of the market price variation is due to your favorite cause of skew leptokurtic returns instead of any of the other causes of the same price chart patterns.I have never tried to emulate your false claims of being able to separate bubble creation from other effects. My only quantitative argument is the example from Mandelbrot & Taleb that shows that ten days of (mostly) busts take away about half the gains of 20 years. The ideological bluster is all yours.QuoteQuoteQuoteIf Benanke and Paulson knew they were creating an intentional and fraudulent asset price bubble, why did they flounder so badly when it popped? I'm not very smart and yet I would have been a much smarter bubble-fraud evil mastermind than these smart money masters of the universe. Thus the empirical effects are inconsistent with the hypothetical causes. That is it looks like the smart money didn't know it was involved in a bubble.No. Just like any other moderately smart person, they knew the bubble would bust -- they just, like most other reasonably smart people -- didn't know when. And yet any study of bubbles would lead to a useful estimate of the relationship between duration-of-bubble, amplitude-to-peak, and depth-of-crash (especially if bubbles are as prevalent as you claim). Not any study. Only a study that tried to limit the concept of bubble to a specific measurable quantity -- which is not what I claim. In any case those quantities you mention are statistical, not deterministic. So even someone who thought they could do that would still be subject to the vagaries of stochastic eventsQuoteMoreover, a true bubble creator would pick the time of it's bursting.I have no doubt that they would like to do so and may even try to do so. But not having monolithic control of the market, they would find it difficult.QuoteHow can you assert that they control bubbles and crashes and assert they don't know when bubbles and crashes happen?I didn't assert that "they control bubbles and crashes" only that they try to create bubbles knowing that they expect to profit in the long run from doing so. As usual you refuse to read but prefer to invent your own straw men.QuoteYou claim its pump-n-dump and yet it can't be that because the alleged fraudsters never dumped, they held and cratered (they're still holding!).I never said execution was perfect and they couldn't get trapped (and bailed out). This is now the fifth time you've tried that very same fallacy in this thread.QuoteAre your really claiming that the smart money was dumber than a teenage online pennystock huckster?I never said anything about penny stock hustling either.QuoteQuoteQuoteI also look at who gained the most in all this economic cycle relative to a bubble-free version of the economy.An impossible task since no one knows what a bubble-free economy would have looked like -- even after the fact.Not at all. Three nearly independent lines of evidence allow the reconstruction of the economy without the housing bubble.Who said we are talking only about a housing bubble?QuoteQuoteQuoteWhat I see is that trillions of dollars moved from rich investorsAnd from workers' pensions and house buyers who suddenly found themselves with negative equity.Most of the negative equity cases represent cases in which the person had no equity to begin with. If you don't believe me, then go look at the data (if you dare).And of course, you will continue to ignore (as inconvenient) those who did have equity, hiding behind more straw men. You've built at least three in this post alone.

Fermion,The percentage of time that participants try to induce bubbles is irrelevant if those participants are ineffective. First, there are actually countervailing incentives for price manipulation in any market. Speculator#1 might be long XYZ and trying to pump the price at the same time that speculator#2 is short XYZ and trying to depress the price. Or speculator#3 might have positive insider knowledge of XYZ and want to depress the price first so it can buy low. Short interest may be small, but it is concentrated among the smart money and has higher incentive for quick price manipulation relative to buy-and-hold long positions. Add options to the mix and you actual have market participants with incentives to manipulate prices toward the middle (e.g., those that are short volatility). To some extent, all these price manipulators may cancel each other out if one is pumping whilst the other is dumping. Second, only a limited fraction of stocks and market conditions would support bubble making -- the pumper needs a stock or market condition that offers a ring-of-truth to the pumping story and needs economic conditions that offer a surplus of risk capital. Pumping ice-making stocks to impoverished eskimos won't work. If conditions aren't right, the cost of pumping exceeds the profits from pumping. Third, if bubble makers try to boost the price 100% of the time (e.g., with a constant drumbeat of TV advertising), then they might induce a constant offset to prices, but no change in intervening price returns. People would find that they bought at an inflated price level and sold at a similarly inflated price level (i.e., PE ratios might be inflated for decades). These issues and more and why I ask: what % of the price movement is due to bubble-makers and what % of the price is due to other skew leptokurtic phenomena? QuoteMy only quantitative argument is the example from Mandelbrot & Taleb that shows that ten days of (mostly) busts take away about half the gains of 20 years.And that's why your argument is so pathetically weak. There are at least half a dozen nonbubble phenomena that cause the same pattern. How do you know that a perfectly bubble-free market (run and occupied by good little Fermionists) wouldn't see a 49% loss of gains if the ten most extreme days were removed from a 20 year period? That's why I ask again and again: what % of the price movement is due to bubble-makers and what % of the price movement is due to other skew leptokurtic phenomena? If you really are a quant, Fermion, you would have some answer to this most crucial of questions.

QuoteOriginally posted by: Traden4Alpha These issues and more and why I ask: what % of the price movement is due to bubble-makers and what % of the price is due to other skew leptokurtic phenomena? To which there is no model-independent answer.QuoteQuoteMy only quantitative argument is the example from Mandelbrot & Taleb that shows that ten days of (mostly) busts take away about half the gains of 20 years.There are at least half a dozen nonbubble phenomena that cause the same pattern.Then list them and, if you claim they can be quantified, do so with adequate documentation rather than asssertions. And mere triggers, like hurricanes, don't count. Neither does anything which is stock- or sector-specific. We're talking S&P here.QuoteThat's why I ask again and again: what % of the price movement is due to bubble-makers and what % of the price movement is due to other skew leptokurtic phenomena? If you really are a quant, Fermion, you would have some answer to this most crucial of questions.If I had the time and resources and half-a-dozen research assistants, I would love to build a model that answered such questions; but I don't. And I would publish my results instead of wasting my time arguing with you.

QuoteOriginally posted by: exneratunriskYour if-rich-then-true theory, witnesses lack of knowledge about evolution. YOu're right that I lack knowledge about computer models of evolution. But I do know about financial markets. And the one truism in financial markets is "Never believe any beginner who claims to have figured it out, how can markets be so insanely stupid. Never believe such a person."

QuoteOriginally posted by: KackToodlesQuoteOriginally posted by: exneratunriskYour if-rich-then-true theory, witnesses lack of knowledge about evolution. YOu're right that I lack knowledge about computer models of evolution. But I do know about financial markets. And the one truism in financial markets is "Never believe any beginner who claims to have figured it out, how can markets be so insanely stupid. Never believe such a person." Yes, but there might be instantiations of the species financial-markets-participants, who say, because-I-am-nice-don't-think-that-I-am-stupid? BTW, my interpretation of the post-crisis economy. The wish to accumulate capital from a globalized market has put globalization under fire and consequently violated itself?

T4A, a little contribution to bubbles. At the fine-wine exchange Liv-ex the always-winning Vintage Wine Fund lost 33% in 2008. Liv-ex has established a separate Lafite-Index, which reached the average price of of a bottle of a Chateau Lafite 82, EURb 2400, and is still growing. This is an obvious bubble to all wine-knowers, only possible, because of a strict concentration on Asian markets. Take Haut Medoc wines only: in many vintages Mouton, Latour, Margaux, ... are "better". And Asian markets will become aware at once.BTW, you mentioned .com bubble. True, but the .com bubble created bandwidth that helped to make the world flatter. The burst of "this" bubble at the other hand, by having trades exploiting globalised opportunities, but with protectionist segmentation?, put globalization under fire ?

QuoteThis third hypothesis for the cause of bubbles has support from behavioral finance and from more abstract studies of agent ecologies.I think this research only supports reasoning by analogy, not reasoning by prediction. Both strands of economics fail: the deductive approach and the empirical approach. Unfortunately the term chaos theory confuses things only further, because it looks at the scientific metholodogy on the wrong level.Bubbles take place at particular time in a particular society. Trying to predict economic events on a grand scale is akin to predicting the outcome of wars, evolution of systems of government, etc.I wanted to throw in the name of Hyman Minsky and his Financial Instability Hypothesis, which hasn't been mentioned:"McCulley also points out that human nature is inherently pro-cyclical, meaning, in Minsky's words, that "from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system's reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt deflation."http://en.wikipedia.org/wiki/Hyman_Mins ... Hypothesis

QuoteOriginally posted by: FermionQuoteOriginally posted by: Traden4Alpha QuoteOriginally posted by: FermionMy only quantitative argument is the example from Mandelbrot & Taleb that shows that ten days of (mostly) busts take away about half the gains of 20 years.There are at least half a dozen nonbubble phenomena that cause the same pattern.Then list them and, if you claim they can be quantified, do so with adequate documentation rather than asssertions. And mere triggers, like hurricanes, don't count. Neither does anything which is stock- or sector-specific. We're talking S&P here.I have clearly enumerated three or four of them by category and example but you are too blinded by your one paranoia-fueled theory that you can't see them.Your emphasis on S&P vs. stock- or sector-specific factors shows how little you understand actual bubble formation and the profit structures of alleged perpetrators of fraudulent bubbles. Given your emphasis on this one minor source of skew leptokurtic returns, I'd think you'd have a deeper model of it. Oh well. (Hint: if you think about the revenues from disequilibria and costs of creating disequilibria, then you will realize that sector bubbles are both more easily created and more consistently and short-term profitable than are aggregate equity market bubbles.)QuoteQuoteThat's why I ask again and again: what % of the price movement is due to bubble-makers and what % of the price movement is due to other skew leptokurtic phenomena? If you really are a quant, Fermion, you would have some answer to this most crucial of questions.If I had the time and resources and half-a-dozen research assistants, I would love to build a model that answered such questions; but I don't. And I would publish my results instead of wasting my time arguing with you.You need to hire smarter or less-lazy research assistants. Estimating an upper bound on the contribution of skew leptokurtic phenomena to returns does not take that long (15 minutes if you already have the data and a related spreadsheet, maybe an hour if you don't). Decomposing the contributions of different skew leptokurtic phenomena (of which bubbles are one source) might take a bit longer although I suspect one can find existing literature about some phenomena that would enable useful estimates of some sources of skew leptokurtic returns (e.g., analyses of the distributions of economic losses due to natural disasters). Judging the % of bubble returns that appear intentionally induced (and profitable to a hypothesized subset of participants) vs. unintentionally emergent might be a bit harder although I suspect that the data are out there for that too. In any case, if you plan to trade the markets on the assumption that certain chart patterns are intentionally created by certain participants, then I'd think you'd take the time to test if your hypothesis were actually true and that the $-magnitude (not time-fraction) of that phenomena is monetizable. Otherwise your will lose copious amount of money and not understand why.

QuoteOriginally posted by: macrotradeQuoteThis third hypothesis for the cause of bubbles has support from behavioral finance and from more abstract studies of agent ecologies.I think this research only supports reasoning by analogy, not reasoning by prediction. Both strands of economics fail: the deductive approach and the empirical approach. Unfortunately the term chaos theory confuses things only further, because it looks at the scientific metholodogy on the wrong level.Bubbles take place at particular time in a particular society. Trying to predict economic events on a grand scale is akin to predicting the outcome of wars, evolution of systems of government, etc.Very true! And yet, the point is that one can predict that bubbles occur (including fraud-free bubbles), even if one can't predict that a particular bubble will (or is) occurring. Thus, chaos theories (at least in financial markets and economies) provide some means of characterizing the population of economic/financial outcomes even if they don't provide predictions on a particular sample outcome or trajectory.Note that in physical systems, chaos theory can actually be used for extremely agile control of the system. Work on a variety of unstable chaotic systems (e.g, an inverted flexible ribbon, over-pumped laser, unstable aerodynamic body, etc.) shows that even a rough estimate of the system's strange attractor enables a controller to stabilize the dynamic regime and to rapidly switch between dynamic regimes.QuoteOriginally posted by: macrotradeI wanted to throw in the name of Hyman Minsky and his Financial Instability Hypothesis, which hasn't been mentioned:"McCulley also points out that human nature is inherently pro-cyclical, meaning, in Minsky's words, that "from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system's reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt deflation."http://en.wikipedia.org/wiki/Hyman_Mins ... esisThanks for bringing this into the thread! Minsky's work nicely details the nonlinear (chaotic) feedback inherent in economies. In particular, the perception/expectation of certainty induces the use of leverage which leads to the creation of unintentional risks and uncertainty. The more confident people are about expected returns, the more likely they are to lose money.

QuoteOriginally posted by: exneratunriskT4A, a little contribution to bubbles. At the fine-wine exchange Liv-ex the always-winning Vintage Wine Fund lost 33% in 2008. Liv-ex has established a separate Lafite-Index, which reached the average price of of a bottle of a Chateau Lafite 82, EURb 2400, and is still growing. This is an obvious bubble to all wine-knowers, only possible, because of a strict concentration on Asian markets. Take Haut Medoc wines only: in many vintages Mouton, Latour, Margaux, ... are "better". And Asian markets will become aware at once.BTW, you mentioned .com bubble. True, but the .com bubble created bandwidth that helped to make the world flatter. The burst of "this" bubble at the other hand, by having trades exploiting globalised opportunities, but with protectionist segmentation?, put globalization under fire ?Hmmm.. the supply of Chateau Lafite 82 is monotonically decreasing and the wealthy customer base (proxy for demand) is monotonically increasing. As for wine quality, perhaps many of the participants in the market recognize (and value) the name on the bottle more than the drink in the bottle. This in not unlike the art world in which people pay a premium for the signature of the painter rather than the artistic quality of the painting. If nouveau connoisseurs learn wine, will Chateau Lafite prices drop or will higher-quality lesser-known wines catch-up in price? Shall we ponder this as we drink Chateau Lafite by the Monet? I do agree that globalization has soiled its own nest. Let's just hope we can avoid a repeat of the 1930s protectionist death spiral.