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Econophysicists Develop and Test "Bubble Index"

samzenpus posted more than 4 years ago | from the the-laws-of-bursting dept.

Education 221

eldavojohn writes "Oh if only we could identify the bubble markets as they appear, but with all the random variables, it would take some sort of econophysicist to build predictions for that! Well, a team has released a definition of a 'bubble index' that led them to make predictions of bubbles six months ago that would pop between then and now. The four bubbles they selected were the IBOVESPA Index of 50 Brazilian stocks, a Merrill Lynch Corporate Bond Index, the spot price of gold, and cotton futures. Two out of the four were bubbles, with Merrill Lynch being a bubble already popping and cotton continuing to soar into even bubblier status. Still, for your first try, 50% isn't bad. The team learned a lot of new things from the first run, revised their method, selected their predictions for the next six months, and sealed them. Only time will tell if they are truly onto predicting crashes."

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Self-fulfilling prophecies (4, Interesting)

DavidR1991 (1047748) | more than 4 years ago | (#32439216)

Does no-one see the problem here? If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.

It's like seeing into the future and acting upon what you see - by doing that you alter the future itself, making the initial prediction invalid.

Re:Self-fulfilling prophecies (2, Interesting)

snowboardin159 (1744212) | more than 4 years ago | (#32439234)

Maybe they have figured a way to incorporate the fact that acting on future events changes those events, so that even then we can still accurately predict whats really going to happen, not what we are making happen.

Re:Self-fulfilling prophecies (1)

siloko (1133863) | more than 4 years ago | (#32440374)

I wouldn't worry too much as they think 50/50 isn't a bad first attempt. I guess they never heard of flipping a coin!

Re:Self-fulfilling prophecies (1)

Barrinmw (1791848) | more than 4 years ago | (#32440492)

Except the system chose 4 out of all the other possibilities. Maybe if we knew how many of all the possibilities showed themselves out to be bubbles. If it was none, then it would be possible to say that it accurately guessed 98/100 or whatever the number of total different markets are.

Re:Self-fulfilling prophecies (2, Informative)

Anonymous Coward | more than 4 years ago | (#32439250)

Right, it's like traffic: if you alert everyone to a blockage somewhere, and everyone reroutes to avoid it, then the alternative routes will get clogged and the original slowed route will now be empty.

Re:Self-fulfilling prophecies (3, Interesting)

fractoid (1076465) | more than 4 years ago | (#32440618)

Right, it's like traffic: if you alert everyone to a blockage somewhere, and everyone reroutes to avoid it, then the alternative routes will get clogged and the original slowed route will now be empty.

That's exactly what you observe on a freeway. There's a merge coming up in the left lane (Australian here, all you backwards U.S. citizens just pretend I'm ambi-dyslexic :P ) so everyone dives into the rightmost lane, which comes to a stop. The fastest way to get through that section of road is to stay in the leftmost lane until the left and middle lanes merge, then try and find a gap in the right lane where some dozy bastard doesn't keep up with traffic. That way you skip the congestion and get into the right lane just as it frees up.

Re:Self-fulfilling prophecies (2, Insightful)

ClickOnThis (137803) | more than 4 years ago | (#32439284)

Does no-one see the problem here? If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.

It's not a new idea. [wikipedia.org]

Re:Self-fulfilling prophecies (2, Insightful)

phantomcircuit (938963) | more than 4 years ago | (#32439312)

The key to the efficient market hypothesis is universal knowledge. Everybody must know everything, reality does not conform.

Re:Self-fulfilling prophecies (2, Informative)

ClickOnThis (137803) | more than 4 years ago | (#32439448)

The key to the efficient market hypothesis is universal knowledge. Everybody must know everything, reality does not conform.

The GP's point was that the bubble index would be "universal knowledge" and thus could not be exploited for advantage, in the spirit of the Efficient Markets Hypothesis. IANAE and I'm not trying to defend the hypothesis. I'm just saying it's not new.

Re:Self-fulfilling prophecies (1)

tsm_sf (545316) | more than 4 years ago | (#32439944)

The GP's point was that the bubble index would be "universal knowledge" and thus could not be exploited for advantage

Is there a difference between 'exploited for advantage' and 'used as a tool to prevent economic catastrophe'?

Re:Self-fulfilling prophecies (1)

corbettw (214229) | more than 4 years ago | (#32439986)

In terms of investing? No, none at all. In the same vein as one man's terrorist is another man's freedom fighter, one man's tool to gain a market advantage is another man's tool to prevent catastrophe.

Re:Self-fulfilling prophecies (2, Interesting)

chrono13 (879557) | more than 4 years ago | (#32439296)

Psychohistory (Asimov's Foundation series) suffers the same flaw. The key was to have a small group hold the answers, and guide/warn when appropriate. The trouble then becomes selecting a group that we can trust with the wealth of nations, and the power to destroy by proclamation. I don't trust any group with that much power not to grow corrupt. Best that this secret be out and become useless.

Re:Self-fulfilling prophecies (4, Insightful)

PPH (736903) | more than 4 years ago | (#32440048)

The trouble then becomes selecting a group that we can trust with the wealth of nations, and the power to destroy by proclamation.

We could call it the Federal Reserve.

Re:Self-fulfilling prophecies (1)

fractoid (1076465) | more than 4 years ago | (#32440950)

I'm surprised it took this long for someone to mention Seldon's work, since it was the first thing that sprung to my mind. I wonder if there's a Chetter Hummin on that team?

Re:Self-fulfilling prophecies (3, Insightful)

Bugamn (1769722) | more than 4 years ago | (#32439326)

You should read more Greek tragedies [wikipedia.org] . When people know the future, no matter what they do, they create the future.

Oedipus Shaft (1)

tepples (727027) | more than 4 years ago | (#32439386)

You should read more Greek tragedies like Oedipus

I can't hear that name without thinking of another bad mother(shut your mouth) [wikipedia.org] .

Re:Self-fulfilling prophecies (5, Insightful)

doppe1 (856394) | more than 4 years ago | (#32439370)

But they don't want the bubble to happen, that's the point. By being able to predict that bubbles are happening, the markets can sell off sooner, rather than allowing the bubble to continue growing, and thus once the sell-off happens, it is not such a dramatic down-shift, since the prices were not allowed to rise to artificial highs.

Re:Self-fulfilling prophecies (2, Interesting)

blair1q (305137) | more than 4 years ago | (#32439418)

And then someone comes along saying they have a similar system and front-runs the panics they cause by claiming they foresee a bubble crashing tomorrow.

Re:Self-fulfilling prophecies (3, Informative)

doppe1 (856394) | more than 4 years ago | (#32439494)

The point is to not allow the bubble to happen in the first place, not to be the first to predict the bubble crashing. If the bubble can be prevented, then panic selling won't happen. When the market bubbles, and then crashes, it doesn't go to an artificial low, it just drops the the point at which steady growth would have taken it. By predicting possible bubbles and preventing them, you should be able to get steadier growth.

Re:Self-fulfilling prophecies (1)

zach_the_lizard (1317619) | more than 4 years ago | (#32439962)

If the low is artificial, does that mean that the high is artificial? Also, what do you mean by artificial? When I see words like that in conjunction with a problem (e.g. bubbles), I tend to think that the solution is to get rid of whatever artificial factor there is, not pile more countermeasures against it (such as this index). There are many schools of thought on this issue.

Re:Self-fulfilling prophecies (4, Informative)

ArsonSmith (13997) | more than 4 years ago | (#32440278)

If the low is artificial, does that mean that the high is artificial?

yes it's all artificial based on the market's perceived value.

Quick simplified example.
Company takes in $1M in stock by selling stock and $1 a price. 100,000 people buy 10 shares each.

10 other people look at what the company is doing with that $1M and think it's a good idea and would be worth lots more so they start saying I'll pay $1.01 a share, $1.02 a share, $1.10 a share...etc until people start selling it. 100 more people see it start going up so they think there must be something going on and say I'll pay $1.20 a share, $1.30 a share, $2.03 a share etc... This is the time of the bubble when people that don't really do any investigation into the market but buy simply because it is going up. At some point there will be some more savoy investors come by and see that the stock is far to high and short sell a stock. A way of borrowing stock at a higher price then getting the difference when you return it at a lower price (or paying the diff if it goes up.) Eventually it'll come out that this company has only been able to turn the $1M into a $1.2M company and not the $2M+ that the market cap has it at and people will start to sell off. This is when the bubble pops.

There are other artificial things that can cause bubbles than just perceived value, like the government backed mortgages causing the real estate bubble.

Re:Self-fulfilling prophecies (1)

feepness (543479) | more than 4 years ago | (#32439586)

But they don't want the bubble to happen, that's the point. By being able to predict that bubbles are happening, the markets can sell off sooner, rather than allowing the bubble to continue growing, and thus once the sell-off happens, it is not such a dramatic down-shift, since the prices were not allowed to rise to artificial highs.

Which, of course, will assure everyone that it can't possibly be a bubble, allowing them to comfortably jump back into the asset.

Stability breeds instability. This will only result in larger bubbles. Never match wits with mass stupidity when money is on the line.

Hand out the hockey sticks (3, Insightful)

NotQuiteReal (608241) | more than 4 years ago | (#32439822)

1) Hand out hockey sticks.
2) Wait for someone with a graph and utters the words "like a hockey stick" when describing said graph (usually while wildly gesturing and telling you why X is such a good investment, why you should stick with the company, or why "it is different, this time").
3) Beat that person with the stick from step 1.
4) Sorry, no profit, but less pain; Widows and orphans are spared... At the very least it is good cardio and even if you are jailed, you get free room and board.

Re:Self-fulfilling prophecies (2, Interesting)

phantomfive (622387) | more than 4 years ago | (#32439854)

And so eventually, everyone will feel safe if this predicts it's not a bubble. And they will keep buying, because the algorithm says it's not a bubble. Then finally someone will realize the underlying asset isn't really worth that much and the bubble will pop. Which is kind of what happened in the real estate bubble.....everyone thought real estate wouldn't have a bubble, and then finally it popped (actually that's not entirely true, a lot of people thought it was having a bubble many years before it popped).

Incidentally it can be really hard to distinguish a bubble, because the value of an object is entirely an objective thing. To you, gold may be worth something, to others it is not. To some a boat is worth a lot because you can go fishing and enjoy yourself, to others it is not. To some a tulip bulb may really be worth their entire estate. I find that crazy, but who am I to judge other people's tastes?

Re:Self-fulfilling prophecies (3, Insightful)

tgatliff (311583) | more than 4 years ago | (#32439940)

That is just simple minded to think we do not want bubbles. We have known since the 1980's that the current path is unsustainable, but was designed to be only transitionary (aka sustain the post industrials until asia's gdp per cap improves). It was thought that the 1990's recession would be the end of the major economic cycle, but the tech bubble and 2000's re-estate bubble slowed the inevitable to this point. It appears we will not be so lucky this time...

In short... It is very easy to see a bubble, and most of us knew exactly what it was. However, to pretend that you want to predict bubbles pretends that you have sustainable system. The current system is not...

Re:Self-fulfilling prophecies (1)

MichaelCox_au (591610) | more than 4 years ago | (#32439384)

That's not a problem, that's a feature! What this system could provide long-term is the ability to spot and predict the possibility of a bubble being created, before it is actually out-of-control. So instead of predicting imminent bubbles which are due to burst, systems like this could provide an early warning and hence allow the market to deflate the bubble in a more controlled manner. Ultimately, this will lead to a more stable and more informed market.

Re:Self-fulfilling prophecies (1)

phantomfive (622387) | more than 4 years ago | (#32439388)

There's an old saying that the market will never be figured out, because as soon as we do, it will suddenly get more complicated because of that. This is pretty much what you are saying.

I'd also like to point out that a 50% success rate isn't really that good when you are picking scenarios that are already likely to be bubbles anyway. In fact it's rather bad. But good they are learning things.

Re:Self-fulfilling prophecies (0)

Anonymous Coward | more than 4 years ago | (#32440360)

There's an old saying that the market will never be figured out, because as soon as we do, it will suddenly get more complicated because of that.

What.

There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable.

There is another theory which states that this has already happened

This [wikipedia.org] is what you meant, right?

Re:Self-fulfilling prophecies (0)

Anonymous Coward | more than 4 years ago | (#32440682)

You seem to forget that they predicted crashes for 6-month period. That seems pretty good to me.

Re:Self-fulfilling prophecies (4, Insightful)

dkleinsc (563838) | more than 4 years ago | (#32439390)

Except that they won't, for two reasons:
1. Investors are (collectively at least) really stupid. This has been proven time and again.
2. They think "this time, it's different. We know how to prevent this from becoming a bubble."

For instance, there were smart economists saying back in 2006 or so "watch out, there's a housing bubble". And what most of Wall St did was say "shut up, I'm busy counting my winnings".

Re:Self-fulfilling prophecies (1)

John Hasler (414242) | more than 4 years ago | (#32439594)

> 1. Investors are (collectively at least) really stupid.

You confound the stock market and Slashdot.

> For instance, there were smart economists saying back in 2006 or so "watch
> out, there's a housing bubble".

At any time there is always somebody calling everything a bubble.

Re:Self-fulfilling prophecies (1)

linguizic (806996) | more than 4 years ago | (#32440098)

Unless the investors were super smart and realized they could create a housing bubble, make billions during it, then when it bursts beg uncle sam for billions more and end up with "collateral winners", i.e. people who "inadvertently" benefit from our tax money while 1 and 10 of those of us who paid for it are laid off.

Re:Self-fulfilling prophecies (4, Informative)

SashaMan (263632) | more than 4 years ago | (#32440476)

In truth, identifying bubbles is actually remarkably easy. Famed investor Jeremy Grantham defines a bubble as a "3-sigma" event - that is, times when some fundamental ratio of value (such as P/E ratios, price-to-income ratios for housing affordability, price-to-rent ratios, etc.) - is more that 3 standard deviations above the mean for that ratio. Importantly, he showed that of 30-some odd historical bubbles, they ALWAYS popped, ALWAYS giving up more than 100% of the gains during the bubble period.

What is difficult, though, is trying to figure out WHEN a bubble will pop. The Nasdaq was far overvalued in mid 99 - that still didn't prevent it from DOUBLING in early 2000 before it burst.

Grantham also makes a good case as to why bubbles form. Tons of people in the financial world saw that risk was being underpriced in 2006/07. However, what would have happened if a CEO of a major bank would have said back in late 2005 / early 2006 "This is crazy, we're not going be backing these loans given to anyone who can fog a mirror"? That bank would have seriously underperformed its peers for the next two years, and that CEO would have been ousted long before his prudence would have been proven correct.

Re:Self-fulfilling prophecies (1)

ImABanker (1439821) | more than 4 years ago | (#32440584)

The damned thing is that sometimes it really is different. Compare bond yields and stock dividend yields pre- and post- 1950s, for a dramatic instance. Many called bubble, but were in time proven incorrect. Many (legendary) investors scoffed at the high prices being paid for the "technology" stocks like American Telephone and Telegraph, Radio Corporation of America and International Business Machines in the 1930s. Central banking _has_ evolved such that we are able to prevent depressions, which has important implications for asset prices. The challenge in financial markets is trying to tease out the permanent from the temporary. Finance is not always as simple as saying "prices have increased, ergo bubble. qed."

Re:Self-fulfilling prophecies (1)

d34dluk3 (1659991) | more than 4 years ago | (#32439480)

You just watched Paycheck, didn't you?

A futures market for Shroedinger's cat? (3, Informative)

istartedi (132515) | more than 4 years ago | (#32439542)

A futures market for Shroedinger's cat? Sign me up for that.

A few other thoughts along those lines: Warren Buffet said, "In the short run the market is a voting machine, in the long run it's a weighing machine".

What's interesting about that comment is that he never said what it weighs. People usually infer that it's the value of the company, since Buffet is a value investor. OTOH, the market might really be weighing a number of other things. It might be weighing how much money you have in the first place, since the rich can afford better equipment and advice. It might be weighing the ping time from your office to the exchange, as we've seen with high-frequency traders. It might actually be weighing your skills, and that last one leads to something else.

Let's say, for the sake of argument, that skillful players really can beat the market. Furthermore, let's say that the top 1 % win and the bottom 99 slowly lose. We would expect the 99 to drop out of the market if they were rational. Therein is a fundamental flaw with economics. It assumes people are rational. This is Greenspan's self professed mistake, although IMHO he also failed to realize that firms aren't people and that the people who ran firms into the ground were behaving rationally with respect to their own self-interest (greed). The people who "believed", CEOs, contrary to numbers, were less rational.

So the way I see it, bubbles will continue for the same reason Las Vegas exists. People aren't rational, and nobody really knows where the wheel will be until we OBSERVE that it has stopped spinning.

Re:A futures market for Shroedinger's cat? (1)

PPH (736903) | more than 4 years ago | (#32439964)

Let's say, for the sake of argument, that skillful players really can beat the market. Furthermore, let's say that the top 1 % win and the bottom 99 slowly lose. We would expect the 99 to drop out of the market if they were rational.

Which is why speculators prefer to operate in dark markets. For the 1% to make money reliably, they need the 99% to keep trading. The 99% actually don't lose outright. They just don't make as much. As long as they can't see the entire game, they think they're dong OK and keep playing.

Re:Self-fulfilling prophecies (0)

Anonymous Coward | more than 4 years ago | (#32439574)

Uh.. what? No.

It's like seeing into the future and acting upon what you see - by doing that you alter the future itself, making the initial prediction invalid.

No. If you see into the future that opening your door at 8:12 on your way to work will result in you taking a meteor fragment to the skull and then open the door at 8:12 and die, the prediction was valid. If you avoid opening the door at 8:12 and avoid dying, the prediction was valid. The prediction was invalid if you opened the door at 7:42 and got smacked in the skull regardless.

The goal is to avoid or minimize damage from bubbles bursting. If the market takes a model that accurately predicts bubbles and actively avoids them, goal achieved. It fails when you are actively looking, but you still suffer the same number of and damage from bubbles.

That is not to say that models can seem right but be wrong. Or that there is a material difference between the model and the actual implementation. A few decades back, economists theorized that high inflation suppressed unemployment. Made a model around it. It worked beautifully. Then the government stepped in and started actively manipulating inflation. Unemployment did not go down. The model's inflation was unexpected. The active manipulation was not. The unexpectedness was a material difference.

Re:Self-fulfilling prophecies (1)

nathan.fulton (1160807) | more than 4 years ago | (#32439620)

markets are determined, more and more, not by investors' perception, but by investors' perception of investors' perception.

Re:Self-fulfilling prophecies (0)

Anonymous Coward | more than 4 years ago | (#32439622)

Incorrect. The predictions mentioned in the summary were past predictions. The current predictions have been sealed. "The market" doesn't know what they are, and thus can't act on them. The predictions will be released in 6 months and judged against the actual results.

As for the model impacting and thus altering trading once/if it is fully released, it very well might. But lessening bubbles might be part of the point of the research.

Re:Self-fulfilling prophecies (1)

Chees0rz (1194661) | more than 4 years ago | (#32439666)

Does no-one see the problem here? If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.

It's like seeing into the future and acting upon what you see - by doing that you alter the future itself, making the initial prediction invalid.

What was that, Ben Affleck [wikipedia.org] ? I couldn't understand you behind that rough and tough Bwastin accent.


WHAT'S MY FAVORITE BASEBALL TEAAAAM?!!?

Re:Self-fulfilling prophecies (0, Flamebait)

PopeRatzo (965947) | more than 4 years ago | (#32439946)

Does no-one see the problem here?

You mean the problem of "What the hell is an "econophysicist""? Who comes up with these disciplines, anyway?

I want to be an archaeobioeconolinguaphysicist when I grow up. That would be the study of, um, economical models of the language of microbes doing astrophysics. Or something.

or a anthrometeoreconomist.

Let's face it, if it has "econo" anywhere in the name of the discipline, it's about 2 levels softer than sociology. I don't know how many of you have had the pleasure of meeting economists, but if you have, I bet you agree that the notion of a Nobel Prize in Economics is about as silly as a Nobel Prize in Home Economics. What a scam.

Re:Self-fulfilling prophecies (1)

ShadesFox (1534855) | more than 4 years ago | (#32440090)

You know, when your prophecy is 'there is a bubble', rendering that prediction invalid is extremely valuable.

Re:Self-fulfilling prophecies (1)

ArsonSmith (13997) | more than 4 years ago | (#32440206)

This in turn will cause a bubble detection bubble as everyone rushes to buy up the funds of people using the bubble detectors.

Re:Self-fulfilling prophecies (1)

doublee3 (1276070) | more than 4 years ago | (#32440380)

Have these Econophysicists forgotten the Bloomberg uncertainty principal?

Re:Self-fulfilling prophecies (1)

Phil06 (877749) | more than 4 years ago | (#32440498)

But it worked great when we back-tested it!

Re:Self-fulfilling prophecies (1)

vashfish (974328) | more than 4 years ago | (#32440542)

Looks like these physicists get an uncertainty principle too ;)

Re:Self-fulfilling prophecies (1)

pegasustonans (589396) | more than 4 years ago | (#32440592)

If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.

Markets rarely behave rationally. If they did, it wouldn't be so difficult to predict their behavior.

Re:Self-fulfilling prophecies (1)

quantaman (517394) | more than 4 years ago | (#32440782)

Does no-one see the problem here? If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.

It's like seeing into the future and acting upon what you see - by doing that you alter the future itself, making the initial prediction invalid.

Not useless, it causes the bubble to burst earlier, while it's a little smaller, and causing less disruption in the process.

Re:Self-fulfilling prophecies (1)

anaesthetica (596507) | more than 4 years ago | (#32440962)

If this becomes accurate to predict anything of actual use, the markets themselves will start using it... which renders the predictions themselves useless.

This phenomenon is called Goodhart's Law [lesswrong.com] .

We don't need to predict them... (4, Interesting)

davecb (6526) | more than 4 years ago | (#32439290)

... in the years after the 2nd world war we used to treat every wild upswing as a bubble and increase the interest rates. Every downturn got a reduction in rates.

It was the same kind of negative feedback that engineers use to prevent oscillation (feedback squeals, for example).

You'll notice it worked. The converse worked much less well.

--dave

Re:We don't need to predict them... (0)

Anonymous Coward | more than 4 years ago | (#32439490)

Well, it worked... to a definition of "worked" that depends on the individual.

Re:We don't need to predict them... (1)

davecb (6526) | more than 4 years ago | (#32439612)

You can make an entirely general statement about the Americas and Europe in the 1950s and 60s, when this was a general policy. That's the "we" in question, not any particular individual. As to the definition of "worked", a lack of significant bubbles and lows over a significant period, as compared to the years afterward when the policy changed will do the job.

--dave

Re:We don't need to predict them... (1)

AHuxley (892839) | more than 4 years ago | (#32439934)

US firms where rebuilding the world, US interests where protected by a fear of the Soviets. The production lines ran fast and the world imported by need or fear.
Things where 'good' for the US as the market had room to expand worldwide.

Re:We don't need to predict them... (1)

Late Adopter (1492849) | more than 4 years ago | (#32439736)

That's the advice economists have been giving us! But the Fed in the 90s thought home ownership was more important, and kept rates low. Now that there was a recession, they didn't have much to manipulate without hitting zero (which they did).

Re:We don't need to predict them... (1)

davecb (6526) | more than 4 years ago | (#32439850)

Well, some economists were (;-)) The snake-oil-sales branch of the economics community spent the 80s and 90s loudly saying the successful chaps were being overcautious...

--dave

Re:We don't need to predict them... (1)

tobiah (308208) | more than 4 years ago | (#32440084)

The Fed's mathematical model could use some finesse; increments of 0.5% don't make much sense when you're hovering around zero.

Re:We don't need to predict them... (0)

Anonymous Coward | more than 4 years ago | (#32440526)

The Fed and Congress worked together on this one. The Fed is right when it says it shouldn't be politicized. Trouble is, it was politicized a long time ago.

The Fed is not the fundamental flaw here, as so many believe. The fundamental flaw is that we conflated affordable credit with affordable housing. They are not the same. Affordable credit means low interest rates and, ironicly, overpriced housing. Affordable housing means just that--houses that cost lest, with no leverage involved.

The flaw goes deeper than that. Since few people can afford to buy a house for cash, most use credit, which is actually leverage. Most people wouldn't buy stocks on margin, but everybody is forced to buy a house on margin. Margin is great when prices are rising. You get a boost in your return. Conversely, it sucks when prices are falling. You can go bust, as many are now doing, because the asset against which you are leveraged is worth less than you owe.

The way out of this is not to simply trash the Fed. If we do that, the problem will simply reassert itself in some other form. The real way out of this is something like regulated Real Estate Investment Trusts (REITs). Let's say for example that the REITs in your ZIP code (or other regional designation) were permitted to own 50% of the residential real estate, and individuals could own the other 50% in order to keep the market free and available to individuals. Are you with me? OK, no individual REIT can own more than 10% in a region-- a "big 5" and some small REITs keeps that market competitive too.

Now, here's the key: The REITs aren't allowed to use leverage.

What does this do? How does it help? Now you've got real choice: You can invest in real estate without leveraging by purchasing REIT shares. The REITs would have to maintain a list of properties they own. A fall in REIT shares wouldn't hurt you if you dollar-cost-averaged. If you rented from a REIT, your rent would be offset by the dividends, which would be some regulated fraction of their profit (they could be permitted to pay no dividends while growing, since non-leveraged REITs would grow more slowly).

This is the only thing I can think of that might actually lead to affordable housing without the downside. The downside, as it stands, is that nobody really wants "affordable housing" because it's a euphemism for "declining property values".

In other words, we need to recognize that LEVERAGED REAL ESTATE FAILS TO PROMOTE THE GENERAL WELFARE, and thus it actually ought to be unconstitutional in its current form; but that's a bit of a stretch. I think if somebody actually went forth and established the aforementioned REIT system in an area, the benefit would be apparent over time and we wouldn't have to enforce it nationwide--people would simply demand it.

And yes, as a side effect the banks would be far less important than they are now; but I'm not interested in "screwing the banks", I'd just like to see a system that works.

Re:We don't need to predict them... (1)

Lord Ender (156273) | more than 4 years ago | (#32439880)

The post-WWII US economy was good because the rest of the developed world had blown its industrial infrastructure to bits. Any other reason you hypothesize, even if correct, is insignificant in comparison to this overwhelming factor.

fifty percent is bad (0)

Anonymous Coward | more than 4 years ago | (#32439332)

I'd rather predict 0%. That way I could reverse the predictions and get100%. 50% means a flip of a coin would work.

fifty percent is *NOT* bad (4, Insightful)

ClickOnThis (137803) | more than 4 years ago | (#32439522)

I'd rather predict 0%. That way I could reverse the predictions and get100%. 50% means a flip of a coin would work.

It depends on what you're predicting 50% of. If you predict 50% of the winners of a horse race, then half the time you're choosing the right horse. You could probably make a living at the track. On the other hand, if you predict 0% of the winners, you'll go broke betting on the other 9 horses all the time.

Now, instead of 10 horses, imagine hundreds of companies traded on the stock market...

Huh? (1)

msauve (701917) | more than 4 years ago | (#32439414)

Exactly how are they claiming success? Over the past 6 months (their claimed timeframe), gold (or the very close proxy, GLD), is up a bit vs. the Dow and S&P 500, and down a bit vs. NASDAQ. That's hardly a popped bubble.

Re:Huh? (0)

Anonymous Coward | more than 4 years ago | (#32440016)

You don't read "good" do you?

Is it really 50%? (3, Interesting)

Dice (109560) | more than 4 years ago | (#32439428)

How many bubbles did they miss?

Re:Is it really 50%? (2, Informative)

tmosley (996283) | more than 4 years ago | (#32439774)

They claim gold as a success, and yet here we are, less than 1% from the record high, which was set less than a month ago.

This guy fails at predicting bubbles.

Re:Is it really 50%? (1, Informative)

Anonymous Coward | more than 4 years ago | (#32440080)

RTFA and look at their graph. They predicted a bubble in gold spot prices and that it would burst and it did. Just because gold is in another bubble does not invalidate their first accurate prediction.

Re:Is it really 50%? (0)

Anonymous Coward | more than 4 years ago | (#32440316)

One man's bubble is another man's rally.

"If your so smart why ain't you rich?" (3, Insightful)

John Hasler (414242) | more than 4 years ago | (#32439556)

> Only time will tell if they are truly on to predicting crashes.

That and how rich they get betting on their predictions.

You Know (1, Informative)

Anonymous Coward | more than 4 years ago | (#32439588)

Ron Paul, Peter Schiff, and other Austrian Economists predicted these bubbles for some time now

Re:You Know (3, Insightful)

rubies (962985) | more than 4 years ago | (#32439938)

Ron Paul is a crank who likes woo-woo medical practices despite being a doctor.
Schiff predicted eight of the last two crashes.
Both believe in a now disproven philosophy that self regulated entities "know best" - hows that GFC and the Gulf oil spill working out for you?

Re:You Know (0)

Anonymous Coward | more than 4 years ago | (#32440320)

"Ron Paul is a crank who likes woo-woo medical practices despite being a doctor."

If you want to stack economic accolades, books and predictions of yours agianst his ... i would be interested in the results....
.
.
.
.

"Schiff predicted eight of the last two crashes."

That means there's 6 more to go .... got your house in order?
.
.
.
.

"Both believe in a now disproven philosophy that self regulated entities "know best" - hows that GFC and the Gulf oil spill working out for you?"

Too bad it was the government that granted permission to BP to drill w/o needing a "environmental assessment", you seem to be another uneducated individual who barely understands economics or the definitions of corporatism (which we have now .. government and business colluding against the citizens) and self-regulating free markets which was suppressed significantly with Lincoln and then was followed up by FDR and LBJ ... you must be a product of government education by your stated lack of knowledge of these things.

Re:You Know (1)

rubies (962985) | more than 4 years ago | (#32440844)

So, you're a big government libertarian? How does that work exactly?

50% for a frist try? (2, Insightful)

timmarhy (659436) | more than 4 years ago | (#32439628)

50% for a first try is shitty, it's no better then just guessing.

Re:50% for a frist try? (1)

Dice (109560) | more than 4 years ago | (#32439742)

I thought the same thing at first, but that would only be true if they'd looked at four samples and picked winners and losers from there. What they actually did was look at a number of items (the value of N here isn't clear to me) and picked four which they thought were bubbling. 50% of those predictions were correct.

Re:50% for a frist try? (1)

CheshireCatCO (185193) | more than 4 years ago | (#32439808)

So we need to know how many bubbles they missed. If around half of the sample population was bubbles to begin with, it's still no better than guessing to get 50% in the four they picked.

Re:50% for a first try? (1)

oddTodd123 (1806894) | more than 4 years ago | (#32440010)

Only if there was a 50% chance that a given asset market was a bubble.

Re:50% for a frist try? (2, Informative)

linguizic (806996) | more than 4 years ago | (#32440128)

To quote clickonthis in an earlier thread:

It depends on what you're predicting 50% of. If you predict 50% of the winners of a horse race, then half the time you're choosing the right horse. You could probably make a living at the track. On the other hand, if you predict 0% of the winners, you'll go broke betting on the other 9 horses all the time.

Now, instead of 10 horses, imagine hundreds of companies traded on the stock market...

Bubbles are not like coins, there are no fluctuations in the state of "headness" or "tailness".

Re:50% for a frist try? (1)

Lakitu (136170) | more than 4 years ago | (#32440342)

how in the world is that no better than just guessing?

You're going to have to explain your logic on that one.

Gold bubble? (2, Insightful)

codeAlDente (1643257) | more than 4 years ago | (#32439650)

Yeah, the US is firing up the printing presses and borrowing the value of all the gold in Fort Knox every few months. Gold must be in a bubble. The algos told me. Paper dollars backed by Ben Bernanke's good looks are better than the one thing that has functioned as currency throughout human civilization. The econophysicists have helped the financial elite and the central bankers create a rigged, casino-style market that systematically steals from the middle class, and you're congratulating them for gambling at a 50% success rate? Is this what passes for 'news for nerds' these days? This ought to make real nerds want to puke.

Re:Gold bubble? (1)

blue trane (110704) | more than 4 years ago | (#32440292)

America has plenty of gold [goldsheetlinks.com] thanks to mudrock mines in Nevada.

50% (0)

Anonymous Coward | more than 4 years ago | (#32439662)

50% isn't bad? I think I some people could call the at about 50%. Just look at growth, if it looks like it's too good to be true, it probably is... Some people predicted the housing bubble Like Peter Schiff [youtube.com]

FEAR (0)

Anonymous Coward | more than 4 years ago | (#32439720)

I live in fear of the bubble bubble. Soapy Doom.

50% isn't bad? (1)

oddTodd123 (1806894) | more than 4 years ago | (#32439722)

That's possibly the dumbest thing I've read in a long time.

Re:50% isn't bad? (2, Funny)

oddTodd123 (1806894) | more than 4 years ago | (#32440002)

Can I mod myself -1, Dumbass?

An economist ... (3, Funny)

w0mprat (1317953) | more than 4 years ago | (#32439726)

is someone who sees something that works in practice and wonders if it would work in theory. - Ronald Reagean

Next bubble (3, Funny)

mysidia (191772) | more than 4 years ago | (#32439770)

Could be a 'bubbles' bubble.

Due to irrational exuberance in the bubbles index, and investors massively buying up the bubbles indexes in anticipation of a bubble.

Don Ho said it best ... (1)

PPH (736903) | more than 4 years ago | (#32439794)

...Tiny Bubbles.

coin job (0)

Anonymous Coward | more than 4 years ago | (#32439804)

Great job guys, a predictive system that matches flipping a coin for accuracy

Man ... (1)

The AtomicPunk (450829) | more than 4 years ago | (#32439832)

If only we had a powerful and secretive central bank, all of this could be avoided!

I can predict bubbles more easily: (1)

Hurricane78 (562437) | more than 4 years ago | (#32439974)

Are the things traded actual physical objects?
Yes -> A bubble at least every 30 years is scientifically proven.
No -> You’re good.

At least that is the leading view on stock markets since a long time ago.
Of course the gambling junkies don’t care, and the government and companies are their pockets.

Re:I can predict bubbles more easily: (0, Redundant)

compro01 (777531) | more than 4 years ago | (#32440164)

Are the things traded actual physical objects?
Yes -> A bubble at least every 30 years is scientifically proven.
No -> You're good.

Because there were never bubbles in tulips, gold bars, farm animals, grains, etc.

Another Tool To Ignore (4, Interesting)

cmholm (69081) | more than 4 years ago | (#32440014)

Having a new model/metric to play with is nice. But, it wouldn't have made a damn bit of difference with the most recently departed "phantom value". The core issue is that when people are making a lot of money off a hot economic streak, rich people in particular, there's a strong incentive to not screw with the gravy train. Hell, The Economist, for one, had spent three or four years publishing charts and stories suggesting that the western European/North American real estate bubble was unsustainable, and due for correction.

The missing bit of information was exactly what the corrective signal was going to be. The US Federal Reserve - in the person of Mr. Greenspan - could have provided it, but the Fed board is full of conservative bankers that didn't want to rock the GOP's boat. The various Wall Street bankers could have provided it, but instead they were busy putting out increasingly meta-physical financial products to squeeze another round of bonuses out of the market. So instead, they were all Cosmo Kramer, joy-riding the Saab down the expressway for as long as the fumes kept it going.

It doesn't matter what predictive tool you've got, even the Word of the Lord wasn't and isn't going to stop people from trying to grab that extra [your monetary goal here], if there's any money left on the table.

Not impressed (1)

Kreuzfeld (308371) | more than 4 years ago | (#32440066)

A 50% success rate means all their predictive tools are no better than flipping a coin; the only difference is their method has kept them employed.

Econowitch (2, Funny)

Sponge Bath (413667) | more than 4 years ago | (#32440160)

Witches: Double, double toil and trouble; Fire burn, and caldron bubble.
Investor: Am I destined to be king?
Witches: Meh. We give it 50/50.

Color me skeptical (2, Informative)

ImABanker (1439821) | more than 4 years ago | (#32440382)

What was the criteria for evaluating success? TFA says that the impressive result by anyone's standards is that they predicted a crash in gold, which then was roughly flat for the next six months... There is an entire industry of "quants" attempting to do things like this for banks and hedge funds. Of course, they do not publish their results. If you would like to see what a good classification of bubbles looks like, see: http://dealbook.blogs.nytimes.com/2010/01/27/schillers-list-how-to-diagnose-the-next-bubble/ [nytimes.com] . Note also that identifying a bubble is not always sufficient to profit. Julian Robertson of Tiger Fund famously identified the tech bubble - in '97. He subsequently lost billions betting against tech stocks that stubbornly refused to crash until after he had given up.

Re:Color me skeptical (4, Informative)

ImABanker (1439821) | more than 4 years ago | (#32440494)

Having read the paper, this is more ridiculous than I initially suspected. Of the four assets that they identified as being "bubbles", all four increased in price since they made the prediction! The only way to ultimately determine if a bubble is a bubble and not a rational increase in prices is by the subsequent collapse. They try to hedge themselves by saying that it changed into "some other sort of regime", ie non-hyper-exponential growth. So if it is flat, or down, or up they are correct. The only instance they claim to be able to predict is that the asset will not increase hyperexponentially. And they even fail at this, in the price of cotton. Sadly, can claim some knowledge in the realm of finance.

uhhh.... (0)

Anonymous Coward | more than 4 years ago | (#32440568)

Still, for your first try, 50% isn't bad.

Uh, you can get 50% by rolling dice.

ML Corporates not a bubble (1)

PAKnightPA (955602) | more than 4 years ago | (#32440726)

I think these econophysicists are in error with regard to calling corporate bonds a bubble. A bubble is when prices are out of whack rather than based on some underlying fundamentals. But corporate bond yields were high for a reason. Major companies (Lehman, GM, etc) were going bankrupt left and right. Many companies were being downgraded by the rating agencies. It was the worst recession in 70 years. Of course bond yields were high. People were really worried about default. Now that many companies have started reporting improved earnings though, of course they are returning to normals and the "bubble" is going away. Anyway, the moral of the story is that corporate bonds were clearly not in a bubble.

Potential for abuse/screwups anyone? (1)

dark_requiem (806308) | more than 4 years ago | (#32440836)

So, suppose this "methodology" is used to predict a bubble in a particular industry. Suppose that it is wrong. It will still trigger a huge selloff. Suppose, again, that someone using this "methodology" is motivated by personal gain (turns out economists are human, too. Who knew?). Buy low, sell high, as the old adage goes. Well, how better to buy low than to trigger a massive selloff, then swoop in and buy, buy, buy when there is no actual bubble.

Besides, this is all moot point if you abolish the Federal Reserve. See: The Austrian Theory of the Business Cycle [wikipedia.org]
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