Why Bubbles should be embraced rather than feared

the whaley report

I’ve recently seen a ton of headlines, blog posts, and money manager commentaries discussing bubbles. Most, if not all, are written as “buyer beware” pieces, which warn about the risks of buying into markets that are bubbalicious.

The problem is that bubbles aren’t easily defined and it seems as though everyone has a different definition. Some folks compare current stock market valuations to historical averages to determine a bubble. I’m not a big fan of using valuation metrics to call market tops and bottoms but that’s a conversation for another day.

Other people define bubbles by evaluating the magnitude and duration of a price move to indicate when a market is in a bubble. This type of definition is very subjective and impossible to quantify.

My favorite, albeit absurd, criteria for a market bubble is that irrational exuberance will be present. But regular readers know that I’m data-dependent and I don’t know for the life of me how to quantify “irrational exuberance.”

Needless to say, my take on asset bubbles is completely different.

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