The housing bubble lasted a long time, even when people in 2004 were sounding the alarm bells. It kept going. A bubble bursting doesn't mean everything is getting wiped out, and it's nothing to fear...just something to hedge against. It does hurt people, and that's unfortunate, but it has to happen. It might even put me out of a job, I hope not, but it's very possible.
Yet as much as it hurts, it has to, and will happen. Doesn't mean it will be as bad as 2008, but it's part of the business cycle. I don't think there's any denying that valuations have gotten way out of hand, especially in the private equity and VC world. But trying to call a top is just as hard as calling a bottom, if it were easy policy decisions would be easy.
It's a "creative destruction" within the capital markets. Gets the dumb money out...funds businesses that actually make money and builds upon the rubble on a stronger, firmer foundation.
That assumes the Fed can make the economy grow with the flip of a switch, and that it could contain contagions. I'm all for taking away the Fed's discretionary powers, I think that would smooth the business cycle, but it would not eliminate it. Recessions can occur naturally.
My wife showed me a video earlier of some kids laying under a trampoline, and on top of the trampoline was balloon slowing filling with water. The kids are giggling because they know what's going to happen, they just don't know when: the balloon will pop and they'll get soaked. But the balloon continues to fill with water until it's almost the size of the trampoline top itself. It seems likes it's taking forever to fill, and the balloon is much larger than anyone in the video expected. Maybe it won't pop...and then it finally does. The inevitable happens and the kids are soaked.
I don't think the argument is whether we are or are not in a bubble. It seems pretty clear that a bubble is filling around us (whether that is a slow or quick fill is a personal point if view). The argument really should be how long do we continue to risk getting soaked versus staying dry (keeping our investments). I think some are finding a solution by removing themselves from the equation and taking their investment dollars elsewhere. And that singular act, if/when it starts to exponentially grow, will ultimately decide the timing of the burst.
I'm uncertain if this is true. The market is the market is the market. The value of a company is what investors believe it to be. In tech, unlike an industry like lets say, Automobiles, this "worth" is very difficult to quantify. Tech companies can be scaled to near infinity (Apple) or go to zero with one wrong move. Investors are placing their bets.
Whatever industry replaces "tech" as the next great revolution (perhaps AI?) will have "bubbles" orders of magnitudes greater than what we're seeing now. If you think we're in a bubble now, which we very well could be (I'm unsure), just wait for the future.
It's housing prices in Flint, Michigan. It hit a peak of $172K in 2005. By 2011 it was $106K, or about the same price as in late 1995. Currently it is at $140K, which is essentially the price in 2000. Assuming it goes at its current rate, I guess it will be about the year 2020 before it recovers to its 2005 high.
Now, it's not really fair to call this a "bubble" since externalities are at fault. However, if you look at the increase (1.6x in 10 years) against an inflation rate of 3% (1.3x), you can see that housing was over valued during that period. I'm pulling the inflation rate from http://www.usinflationcalculator.com/inflation/historical-in..., and if anything overestimating it.
If you look at today's price it has a multiplier of 1.3 from the 1995 price, so it is still slightly undervalued, but should catch up to inflation in the next few years.
My point is that despite the credit crunch being the underlying cause of the crash, the market had been growing at nearly twice inflation for 10 years. 11 years after the crash the market is still recovering and it will be a couple of years before you get to reasonable prices. So you can go a very long time before unsustainable growth will collapse. This leads to a very, very long time for recovery.
I live in Japan. It is 2016. The market still has not recovered from 1992. If the world ever gets into an energy crunch, I think we might well look at the last 50 years or so as being a "bubble".
How does a house gain value? You can renovate it (real growth), or you can hold on to it and hope that someone will pay more for it. People don't think about it, but houses are relatively liquid assets. Let's pretend they are tulips, just for fun.
Imagine that you bought some tulips and just by hanging on to them for a while, you can realise a profit. This would be cool because everyone could put all their spare money into tulips and then turn around and sell them for a profit. Because the price of tulips keep going up (and people want to spend some of their gains on other things), eventually people will be able to buy less and less of them. However we might be able to raise salaries so that people can afford these tulips endlessly. In this way the inflation rate will exactly match the increase in price in tulips.
If we can't raise salaries to match the increase in the price of tulips, eventually people will be priced out of the tulip market and demand will dip. This will cause the price to fall. If people start to think, "Hey wait a minute. I'm not guaranteed to make a profit with these tulips after all", the price can fall a lot. If people start realising that they need to take a loss on their tulips so that they can afford to eat today, the price can tumble. How far can it fall? Mostly it depends on how clever people were for keeping the tulip bubble going. The more clever they were, the worse the potential fall. Essentially, it is likely to fall to the point at which the price of tulips escaped from inflation -- because it is a liquid asset and the need for tulips hasn't increased substantially over that time period.
Demand can influence the price of houses (and obviously did in Flint), but the degree to which the market dropped was a result of how overcooked the housing market was. Beware. Flint was never as overcooked as some markets are and people were never as clever about keeping the values high as some markets are.
Can a bubble last 10 years or more and then wipe out all of those gains? Absolutely. I only picked Flint because young people are likely to have heard of the problems there. You could also look at the housing market in London in 1991/1992.
Can the tech bubble burst and wipe out 10 years of gains? Sure. No problem. That's the only way I could interpret the person's question, "Can a bubble that has lasted 10 years still be called a bubble?" Definitely.
To be more mathematical, your property is the house plus the land under it.
People will not pay more for the house than replacement value. If you keep it in good order, you can keep that value up.
The land can't be `replaced'. So for pricing we look at the whole future income stream discounted to today's dollars at some appropriate interest rates.
That income stream is, yes, basically what other people are willing to pay to use that piece of land.
What people can afford to pay for rent is basically what's left over after they paid other things. You can see it as an auction. That's why land values in silicon valley are so high. (Exacerbated by the fact that local regulation there makes it almost impossible to substitute capital for land, ie you can't build up.)
But it's also very important to understand that there is a ceiling. There will be a point at which Silicon Valley startups will stop increasing salaries. People will no longer be able to buy a house. Demand will drop and so will prices. If this occurs at the same time interest rates rise, people will not be able to afford to renew their mortgage and the house of cards will tumble. If the prices are really high and nobody has paid off any of the capital on their properties (as in London in 1991/92 and Tokyo where people had multi-generational mortgages), people will not be able to afford to sell because they owe more than they can sell the house for. But they will be forced to sell because they can't afford the new mortgage. There will be a rash of personal bankruptcies and unless someone steps in, very, very nasty things will happen. In London, the Japanese bought up the land (ironically just before their bubble burst). In Tokyo the government stepped in.
I don't know when, but everything is lined up "nicely". Ridiculously low interest rates, sky high prices, insane salaries. Even if SV companies move to a cheaper location to save on salaries it could trigger the collapse. Seriously not looking forward to a time when the fed raises interest rates to protect a falling dollar... Etc.
That's why I am in favour of taxing land values (as a proxy for unearned land rent), and the central bank targeting nominal GDP levels.
The former policy dampens land price bubbles and raises taxes in the most economically efficient way possible; the latter avoids real shocks in one part of the economy taking the whole house of cards down.
Ideally, no single company would then be too big to fail.
But the term bubble, at least when used by the media, also seems to have a connotation of bursting in the near future. If someone told me tech was in a bubble, but the pop wouldn't be for another century, I would not define it as a bubble. Even if the future pop was enormous.
What if the century long bubble concluded with a pop that resulted in total economic collapse? I'm not suggesting that is likely, just that the defining characteristic of a bubble seems to be the magnitude of the fallout after the pop, not the span of time leading up to the pop.
Investors, especially those of public companies, are known to be short sighted. Typical investors would never call it a "bubble" if they felt the pop wasn't for another decade, let alone a century.
Perhaps both the magnitude and the time leading up to it are of equal importance.
It's probably better to think of bubbles as the accumulation of unsustainable behavior.
Obviously we aren't able to predict a few months into the future, let alone a hundred years, so it's hard to definitively say whether current behavior is sustainable for a hundred years or not.
It's much more reasonable/believable to say that current behavior is unsustainable for 1, 5, or 10 years.
Which brings up the interesting problem that, in theory, we can never be sure it is or is not a bubble unless we look at the behavior in the limit as t -> infinity. One problem with gauging things in the universe (or in the economic sense, the fundamentals in order to value something) is that we will likely never have the tools to do it in the "real" sense.
It hasn't lasted ten years. The last one ended with the great recession, and was of course never a bubble of the scale of the dotcom bubble. This latest semi-bubble (ie extremely elevated valuations) - caused solely by the Fed's hyper low interest rate policies pushing up all asset prices - is far more similar to 2005-2007 than 1999. The pre great recession semi-bubble in tech was also caused by asset inflation from bad Fed policy mistakes.
It's also why this latest bubble / not-bubble was popped by the first Fed moves toward hiking rates. All the panic around unicorn blood in the street started exactly in line with the Fed's moves to hike rates (nice coincidence eh). And it's also why the stock market has struggled to move higher since the Fed's QE program ended (sideways for ~19 months now). If the Fed hikes rates (which they won't in any meaningful way), it'll continue to deflate all elevated asset prices.
one could argue there was a kind of bubble of the American middle/working-class from say 1945 through the 80's/90's. and that this bubble has been deflating since, through a combination of Mexican labor immigration (both legal and non), off-shoring of jobs to China/India/etc, and the increasing automation of software and hardware whose benefits disproportionately flow towards the capitalists and the highly technical specialists like programmers. That would be a kind of bubble which lasted a half century. Period where that segment of American was "over-valued" relative to otherwise comparable people who happened to be born in other countries around the world.
But by that logic if global warming throws us back into a pre-industrial age, we could call the entire period from the industrial revolution until now a bubble. Or we could go even bigger and say if all of humanity happens to die out due to some self-created catastrophe, humanity was the bubble.
Yet as much as it hurts, it has to, and will happen. Doesn't mean it will be as bad as 2008, but it's part of the business cycle. I don't think there's any denying that valuations have gotten way out of hand, especially in the private equity and VC world. But trying to call a top is just as hard as calling a bottom, if it were easy policy decisions would be easy.
It's a "creative destruction" within the capital markets. Gets the dumb money out...funds businesses that actually make money and builds upon the rubble on a stronger, firmer foundation.