From the earliest days of RealClearMarkets (2007), your editor has tried to banish the word “bubble” from all titles in the center column. The effort wasn’t completely successful since the meaningless adjective was popular among other editors, but persistent persuasion ultimately paid off. For the most part readers haven’t had to suffer an empty descriptor for the near twenty years that RealClearMarkets (RCM) has existed.
What was true about “bubble” and its meaninglessness remains true today. What never made sense can’t later be revived as sensible. Bubble is ludicrous, the stuff of attention and click-seekers eager to attract readers in the way that “Paul Krugman is confused,” "the coming crash," “surefire cure for balding,” and a few other catchy title insertions invariably do.
To grasp the overwhelming absurdity of “bubble” talk, consider “Why It’s So Hard to Spot a Stock Market Bubble," the latest column by Jason Zweig, the Wall Street Journal’s excellent market columnist. Two things: when I saw the title I wanted to find Zweig’s email to tell him it’s impossible to spot a stock market bubble because they don’t exist, but then I thought of the brilliant Journal essayist Joseph Epstein and his recall that he’s yet to win an argument…
All that, plus the joke would have in some ways been on me. After all, Zweig’s column ran at the top of the Saturday edition of RealClearMarkets. Worse, Zweig’s title was the same as what was in RCM’s center column. The surely lazy, empty word that is “bubble” made it into a RCM headline. Which means I’ll give my RCM colleague Joseph Calhoun a hard time for not substituting “mania,” “obsession,” “frenzy,” or some other less offensive word for “bubble.” Calhoun loathes "bubble" too. Anything, absolutely anything but “bubble.”
Needless to say, Zweig’s piece was instructive as they frequently are. In explaining how to spot a “bubble,” Zweig revealed why they’re like donut holes. Get it?
In Zweig’s words, “The ultimate sign of a bubble is performance-chasing behavior. An asset goes up in price because people are buying it, so more people buy more of it, making the price go up even more.” The speculation here is that Zweig will, in time, wish to retrieve what he wrote.
That’s because what he wrote reveals not “bubbles,” but why there’s no such thing. The previous truth can be found in “An asset goes up in price because people are buying it, so more people buy more of it, making the price go up even more.” Just ask yourself the “tales” side of Zweig’s “heads” scenario.
“Because people are buying it” logically implies that people are selling so that people can buy it. And there’s more sellers as “people buy more of it.” Zweig’s definition implies that in “bubble” scenarios there are only buyers. Except that the latter is an impossibility. Much like “bubbles.”
All of this is revealed in Zweig’s headline. While he unfortunately paid lip service to the existence of something that quite simply doesn’t exist, he acknowledged they're difficult to spot ahead of his odd explanation of how to best spot a “bubble." Well, yes. What doesn’t exist isn’t just hard to spot, it’s impossible.
Which is why the track record of the investors who claim to have spotted past “bubbles” is the ultimate “bubble,” and the ultimate evidence of “performance chasing” as asset allocators who should know better mistake insanely lucky timing for prescience. Luck rarely strikes twice or, as I titled the penultimate chapter of my 2015 book, Popular Economics, “If They Tell You They Predicted the ‘Financial Crisis,’ They’re Lying.”
