Are We In A Stock Market Bubble?
My approach was qualitative and therefore subjective. What really like about Dalio’s bubble assessment are his six metrics which are combined in the chart above:
- How high are prices relative to traditional measures?
- Are prices discounting unsustainable conditions?
- How many new buyers (i.e., those who weren’t previously in the market) have entered the market?
- How broadly bullish is sentiment?
- Are purchases being financed by high leverage?
- Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains?
That is as good a measure as any. We will see if the backtest results in a real time indicator when if this turns into a full blown bubble and when that bubble pops.
I like a squishy, imprecise measure of a bubble — namely, when otherwise rational people go mad in the greed-laden pursuit of easy riches:
The underlying belief of all speculative manias is this:
You can get fabulously wealthy with early access to a trade, a small amount of capital, and a bit of luck.
Not required: Skill, hard work, sustained effort, risk management, capital, failure, recovery AND good fortune.
— Barry Ritholtz (@ritholtz) February 23, 2021
Bottom line: More of a bubble than 1 year ago, still less of a bubble than 1999-2000.
Bottoms Are Easier to Spot than Tops (February 17, 2021)
No, It Is Not a Bubble (Yet) (February 27, 2020)
Trump: The Economy is in a Bubble (No, its not) (December 21, 2015)
Checklist: How to Spot a Bubble in Real Time (June 9th, 2011)
Are We In a Stock Market Bubble?
February 22, 2021