Robert J. Shiller, a well-known Yale economist and author of Irrational Exuberance, came up with a checklist on how to determine the next bubble. The checklist is as follows:
- Sharp increases in the price of an asset like real estate or dot-com shares
- Great public excitement about said increases and even the non-investors are giving you stock tips
- An accompanying media frenzy
- Stories of people earning a lot of money, causing envy among people who aren’t earning that much
- Growing interest in the asset class among the general public
- “New era” theories to justify unprecedented price increases
- A decline in lending standards ala sub prime
- Valuations, P/E, price-to-sales etc rise two and then three standard deviations away from the historical mean
- Trading volume spikes in the stock market dramatically for a long period
I feel the list above is non-exhaustive. There are other indicators to predict a market bubble as well.
I have been reading more on the economy for some time now as it is kind of interesting to me. I will have more posts on the economy in the future, just like the one I did a few days ago on sector rotation.
SudhanP.com 