Fun article from Cliff. Quote then download.
2. Bubbles, Bubbles, Everywhere, But Not All Pop or Sink
The word “bubble,” even if you are not an efficient market fan (if you are, it should never be uttered outside the tub), is very overused. I stake out a middle ground between pure efficient markets, where the word is verboten, and the common overuse of the word that is my peeve. Whether a particular instance is a bubble will never be objective; we will always have disagreement ex ante and even ex post. But to have content, the term bubble should indicate a price that no reasonable future outcome can justify. I believe that tech stocks in early 2000 fit this description. I don’t think there were assumptions— short of them owning the GDP of the Earth—that justified their valuations. However, in the wake of 1999–2000 and 2007–2008 and with the prevalence of the use of the word “bubble” to describe these two instances, we have dumbed the word down and now use it too much. An asset or a security is often declared to be in a bubble when it is more accurate to describe it as “expensive” or possessing a “lower than normal expected return.” The descriptions “lower than normal expected return” and “bubble” are not the same thing.
As a current example, take US government bonds. They are without a doubt priced to offer a lower prospective real return now than at most times in the past (as, in my view, are equities). But could it work out? With an unchanged yield curve, which is certainly possible, you would make a very comfortable 4%+ nominal (call it 1%–2% real) a year now on a 10-year US bond, and to find a case where bonds worked out from similar levels, one only has to utter the word “Japan.” Does this make bonds a particularly good investment right now? No. Does it show that they do not satisfy the criteria for the word bubble, thereby demonstrating how the word is overused? Yes.