- Capitalism and Alternatives -

Bubble vs. Glass of Water Ratio

Posted by: Stuart Gort ( USA ) on November 25, 1999 at 12:25:44:

In Reply to: Boo Birds and the Bubble posted by Quincunx on November 24, 1999 at 23:36:59:

:: Well, that is what many people on the streets and offices of America might be saying but is it really reason for being optimistic? I think Patrick Artus may be right in his outlook. Read more about it here.

Yeah, there is a bubble. The question is; how overpriced is the market? Once that question is answered, a follow up is; what is the inflated value difference expressed as a percentage of our economy. There aren't too many who put that above 10% - Mr. Artus notwithstanding. A prudent investor looks long term rides out the bubble pops. The crash of '29 was not due to overvalued stocks. It was due to the system not having any mechanism to deal with human irrationality - namely panic. Those mechanisms are now in place and preclude an event of that magnitude from ever occurring again. It's part of the reason our markets are so stable next to the other world markets. Note the relatively steady performance of the Japanese markets after their adjustment. Note that the only people truly hurt were those who trade for a living and pulled out in a panic.

With all deference to Mr. Artus, the Japan economy spiked up solely because of artificial meddling by the Japanese monetary ministers who were way overconfident of Japan's economy, given their remarkable growth from '75 to the early '90's. They raised spending by 3% in one budget and slashed wholesale interest to below .5%. This served exporters very well (this policy was a bit of an economic battle with the U.S.) but created great liquidity. With cheap cash available interest in their stock market dried up and hence, their bubble burst. Note that after the bubble burst the Nikkei averages between 15,000 and 22,000 now - up 400% from the '77 average. Those are outstanding long term returns that anyone enjoyed who didn't overreact in the '90 adjustment.

Now, note the extreme volatility of the Japanese economy vs. any American market you choose to observe. They shoot up and down in massive swings whereas the American markets show far less volatility and consistent growth. Our markets will adjust soon, probably to the tune of 10% or possibly 15%. It won't bother me - I'll keep my savings in the finest, most consistent, and safest markets on the planet. Even after that drop I'll be up 283% since '90.

Have nice revolution you guys,

Stuart Gort

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