Bubbles in Everything
There is not a single asset class that has not been pronounced as being in a ‘bubble’ in recent years. My working definition of a bubble is anything that goes up in price faster than The Economist magazine can understand. Now bubbles have apparently spread from assets to services, with a ‘bubble’ in, of all things, freight:
Clearly, investors in shipping companies—and the brokers who book freight—are looking beyond the horizon. It takes a long time to turn an oil tanker around, and the shipping market is slow to respond to sudden upturns in demand. Prices for freight rose so rapidly in 2003 and 2004 in part because it takes a long time to commission new oceangoing tankers and container ships.
When demand rises more rapidly than capacity, of course, the natural response by companies is to increase capacity. But now there’s concern that capacity growth could outstrip demand. If China’s growth slows dramatically, and global demand for oil doesn’t materialize as projected, in a few years there may be a lot of empty ships haunting the seas, like so many Flying Dutchmans. And investors in many of these newly public companies could be left high and dry.
What makes this article so annoying is that the author actually carefully analyses the various fundamental factors that are driving global freight, all of which argue against the notion that shipping is subject to a bubble, unless you see freight as being a sub-set of a China ‘bubble.’ It seems the author is using ‘bubble’ as shorthand for anything that is subject to a rise and possible fall in price driven by fluctuations in supply and demand. That’s not a bubble: it’s a market.
The article is also interesting in showing the parochial nature of the debate about capacity constraints in Australia. US west coast ports are severely stretched coping with imports from China. This is just the flipside of the commodities export bottlenecks in Australia.
While it is now taken as an article of faith that the Nasdaq saw a bubble in the late 1990s, this conventional wisdom is also being challenged:
Contrary to what many academics and finance practitioners believe, Nasdaq prices at the turn of the millennium did not necessarily constitute a price bubble. The authors’ stock valuation model suggests that the fundamental value of firms increases with uncertainty about future profits. This uncertainty was abnormally high during the late 1990s and led prices to be unusually high as well. In fact, Nasdaq prices were not far from firms’ real values, so the description of the phenomenon as a bubble is incorrect.
posted on 15 July 2005 by skirchner
in Economics
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Comments
Sure, apart from its staggering distance from empirical reality there is nothing wrong with this statement. <a >Here is a chart</a> which tracks the performance of the NSADAQ index over the past generation. The NASDAQ is currently hovering around the ~2,000 mark, about where it was in 1999. In short, tech stocks have been in a bear market for about six years, since Greenspan/George Bush turned on the financial and fiscal spigots in the wake of the “irrational exuberance”.
And lets not go into how far off NASDAQ is off peak values of about 5,000, when Yahoo was worth more than Boeing.
Anyone who challenges the CW on dot.coms is either a crank or a crook.
Posted by Jack Strocchi on 07/19 at 02:04 PM
“In fact, Nasdaq prices were not far from firms’ real values”
Stephen, your (apparent) belief that there are no bubbles is every bit as silly as the “bubbles in everything” nonsense at the moment. Nasdaq 1999 was a bubble, no doubt about it. It was only sustained by fear of missing out on ever increasing stock prices, it had absolutely nothing to do with uncertainty about future profits. Everyone (and I mean everyone!) knew that dotcoms would never produce earnings to justify their share prices.
What next? Are you going to tell us there was no bubble in 1980s Japan? The Dutch tulip bubble was rational?
Posted by .(JavaScript must be enabled to view this email address) on 07/19 at 02:24 PM
David, actually the Dutch tulip ‘bubble’ (and many others) was debunked by Peter Garber in his book “Famous First Bubbles.”
Posted by skirchner on 07/19 at 03:10 PM
So things are fine with the Japanese financial system, junk bonds, S&L’s, dot.coms, telcoms, “Nothing to report here, just move along”?
The dot.com bubble was an obvious rort. Companies were padding earnings, issuing absurd prospectuses, orchestrating phoney IPO buzzes, witholding scrip - anything to cash in before the greater fool got wise.
In the post-war period (1943-73) Wests mixed economy industrial system managed to power along on a very high productivity growth rate with regulated labour and capital markets. There was very little money wasted or rorted on financial churning or boom-bust hysteria.
We then had a very ordinary period of growth (1973-93) marked by riotous New Left cultural and New Right financial policies. Then the tech boom and PRC’s industrialization has swept us all along, but the prosperity is threatened by pixel-shuffling swindlers and touts.
One makes wealth by production, not distribution. Why is this principle so difficult both statists and capitalists to grasp?
Posted by Jack Strocchi on 07/19 at 03:54 PM