Reactions to story from The Wall Street Journal

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  Solar Stocks

  http://sycblog.blogspot.com/2008/06/solar-stocks.html
  35 days ago in SY Blog · No authority yet

  Lately I have been thinking about buying solar stocks, because most of them have volatile trends, so it is possible to make some short term money. A few new stocks came out early last year and some of them have gone up significantly. On the other hand, I am afraid the bubble will burst. But after reading an interesting WSJ article, I thought carefully chasing market bubbles may not be a bad thing, so I finally bought JA Solar (JASO) at 20.75 two weeks ago, let's see what will happen. Found a solar stocks comparison table, how come almost all the 2009 P/E ratios are much lower than the 2008 P/E ratios ... may be I need to find a chance to get rid of JASO sooner.
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  Marcus Brunnermeier explains sub-prime crisis

  http://mostlyeconomics.wordpress.com/2008/06/04/marcus-brunn...
  50 days ago in Mostly Economics · Authority: 26

  There was recently a superb story in WSJ about Bernanke’s Bubbles Lab. On reading the article I came across work of Prof Marcus Brunnermeier (of  Princeton University) and decided to take a look at it. Prof Brunnermeier is an expert in financial bubbles (which is of course) and much of his research centres on how bubbles take shape and what can we do about it. He has provided a very neat summary of his work. His researchon sub-prime crisis is a must read for all those interested in the development. Unlike previous research by Rogoff et al and Michael Bordo (covered here) which says no crisis is different and looks at broad economic indicators of crisis, Prof Brunnermeier instead looks at various financial variables to explain the crisis-  liquidity, financial indices and moreover how financial firms actually work. Highly recommended! PS. Infact all his papers are worth a read.
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  Why Financial Asset Bubbles Happen

  http://www.parapundit.com/archives/005209.html
  64 days ago in ParaPundit · Authority: 74

  Why Financial Asset Bubbles Happen An interesting article in the Wall Street Journal reports on economics researchers at Princeton University who believe market bubbles are caused by conditions that allow the optimists to get the upper hand in driving up asset prices. Mr. Hong, who came to Princeton two years later, and now is 37, argues that big innovations lead to big differences of opinion between bullish and bearish investors. But the deck is stacked in favor of the optimists. One who believes a stock is too high can short it, borrowing shares and selling them in hopes of replacing them when they're cheaper. But this can be costly, both in the fees and in the risk of huge losses if the stock keeps rising. Many big investors rarely short stocks. When differences between bullish investors and bearish ones are extreme, many of the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher. Look at Warren Buffett. He's an investment genius. But he rarely tries to make money on falling markets. Bubbles seem like a sign of inefficiency in markets due to flaws in human cognitive processing. Now Federal Reserve chairman Ben Bernanke recruited many of these researchers while he was at Princeton. So Bernanke obviously understands we are dealing with the popping of yet another bubble. The debt taken on to drive up prices of assets means that when the downturn comes previously optimistic investors are forced to sell by their needs to raise money to service debt obligations. That makes the downward path steeper than the upturn that preceded it. At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down. There's an expectation that at this point, investors who were skeptical may see prices as more reasonable and start buying. If they don't, that's a signal that prices had gotten way too high -- and then they tumble. The insights of bearish investors "are more likely to be flushed out through the trading process when the market is falling, as opposed to when it's rising," Mr. Hong and Harvard's Jeremy Stein write. They say this explains why prices fall more rapidly than they go up. Over 60 years, nine of the 10 biggest one-day percentage moves in the S&P 500 were down. When a lot of borrowed money is involved -- as it often is in a bubble -- once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt. That pattern offers a strong argument, in Mr. Hong's view, for government to restrain bubbles and the borrowing that fuels them. Bubbles can turn a profit for those who do not believe the Panglossian rhetoric of bubble boosters. During the 1990s dot com tech bubble some hedge funds skillfully played both the run-up and the collapse of tech stock prices. Looking through security filings, Mr. Brunnermeier and Stanford's Stefan Nagel found that hedge funds on the whole "skillfully anticipated price peaks" in individual tech stocks, cutting back before prices collapsed and shifting into other tech stocks that were still rising. Hedge funds' overall exposure to tech stocks peaked in September 1999, six months before the stocks peaked. They rode the bubble higher and got out close to the right time. Unfortunately the high commodity prices of today do not show signs of being part of a commodities bubble. So we aren't going to get back to cheaper commodity prices just by hitting the limits of a bubble. Today, there's disagreement over commodity prices: to what extent do they reflect fundamentals like Chinese demand, and to what extent investment mania? Trading points toward a bubble: Daily volume on crude-oil contracts is running 50% above last year. Yet the initial findings of work Mr. Hong has done with Motohiro Yogo of the Wharton School -- comparing cash prices and futures prices -- suggest that "prices for commodities are expensive," but not a bubble, Mr. Hong says. By Randall Parker 2008 May 20 05:17 PM Economics Business Cycle
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  Bubbles vs. Non-Bubbles

  http://econlog.econlib.org/archives/2008/05/bubbles_vs_nonb_...
  68 days ago in EconLog: Library of Economics and Liberty · Authority: 629

  (May 16, 2008 01:32 PM, by Arnold Kling) From an interesting Wall Street Journal item: Bubbles emerge at times when investors profoundly disagree about the significance of a...
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  Political bubbles

  http://unenumerated.blogspot.com/2008/05/political-bubbles.h...
  67 days ago in Unenumerated · Authority: 30

  In response to this Wall Street Journal article, describing a number of scholars developing mathematical models of market bubbles, I posted the following comment at Marginal Revolution which is worth reposting here: The scholars quoted in the original article sound like they are just engaging in a fancy form of technical analysis, which purports to capture in mathematics the psychology of the crowd, but in almost all cases turns out to be worthless numerology. The fancy math doesn't explain bubbles any better than [Robert] Schiller's simple driving analogy: there is a big event at an obscure location (let's call it Burning Man, out in the middle of the desert somewhere). People driving to the event are very uncertain of the directions. At a certain intersection, on average 60% of them correctly believe they must turn right and 40% incorrectly believe they must turn left. But they can usually reduce their uncertainty by observing the behavior of others, who are somewhat more likely to be correct than wrong, and altering their [probability estimates] accordingly. Normally this works, but on rare occasions it goes wrong: for example, if the first three cars happen to turn left, the fourth, who had believed with 60% confidence that right was the proper direction, will rationally change his mind and go left. Thus a string of bad luck can make all the cars start going off in the wrong direction, except for those handful of drivers that are strongly confident in their knowledge that one should go right. Where this analogy goes off the rails as public policy analysis is with the tacit hubris that certain academics from sufficiently elite schools are flying above the whole event in a helicopter and can direct traffic, if only their mathematical analysis is fancy enough. Rather academics and policy makers are in the traffic themselves, generally seeing information biased in ways similar to or even more extreme than the information investors see and act on. In many cases mispriced markets create arbitrage opportunities for truly knowledgeable investors, but analogs to such arbitrage opportunities, i.e. the ability to be rewarded for correcting actual misinformation, are much less prevalent in academic and political policy circles. We should thus expect political policy to be much more prone to biased political fads and herd-following than markets are. Both markets and governments may often take wrong directions, but for politics the inability to correct wrong directions may be endemic. Markets tend to correct themselves, usually in the short run and practically always in the long run, depending on the costs of arbitrage, but there is often no easy way to recognize or correct a political bubble. Thus, applying the same rational uncertainty assumptions to politics as we do to markets, if we give political decisionmakers the power to "pop" bubbles they think they recognize, they will probably tend to make genuine market bubbles worse, will prevent markets from sending genuine supply and demand signals, and will introduce other extra transaction costs.
• 

  Political bubbles

  http://unenumerated.blogspot.com/2008/05/political-bubbles.h...
  67 days ago in Unenumerated · Authority: 30

  In response to this Wall Street Journal article, describing a number of scholars developing mathematical models of market bubbles, I posted the following comment at Marginal Revolution which is worth reposting here: The scholars quoted in the original article sound like they are just engaging in a fancy form of technical analysis, which purports to capture in mathematics the psychology of the crowd, but in almost all cases turns out to be worthless numerology. The fancy math doesn't explain bubbles any better than [Robert] Schiller's simple driving analogy: there is a big event at an obscure location (let's call it Burning Man, out in the middle of the desert somewhere). People driving to the event are very uncertain of the directions. At a certain intersection, on average 60% of them correctly believe they must turn right and 40% incorrectly believe they must turn left. But they can usually reduce their uncertainty by observing the behavior of others, who are somewhat more likely to be correct than wrong, and altering their [probability estimates] accordingly. Normally this works, but on rare occasions it goes wrong: for example, if the first three cars happen to turn left, the fourth, who had believed with 60% confidence that right was the proper direction, will rationally change his mind and go left. Thus a string of bad luck can make all the cars start going off in the wrong direction, except for those handful of drivers that are strongly confident in their knowledge that one should go right. Where this analogy goes off the rails as public policy analysis is with the tacit hubris that certain academics from sufficiently elite schools are flying above the whole event in a helicopter and can direct traffic, if only their mathematical analysis is fancy enough. Rather academics and policy makers are in the traffic themselves, generally seeing information biased in ways similar to or even more extreme than the information investors see and act on. In many cases mispriced markets create arbitrage opportunities for truly knowledgeable investors, but analogs to such arbitrage opportunities, i.e. the ability to be rewarded for correcting actual misinformation, are much less prevalent in academic and political policy circles. We should thus expect political policy to be much more prone to biased political fads and herd-following than markets are. Both markets and governments may often take wrong directions, but for politics the inability to correct wrong directions may be endemic. Markets tend to correct themselves, usually in the short run and practically always in the long run, depending on the costs of arbitrage, but there is often no easy way to recognize or correct a political bubble. Thus, applying the same rational uncertainty assumptions to politics as we do to markets, if we give political decisionmakers the power to "pop" bubbles they think they recognize, they will probably tend to make genuine market bubbles worse, will prevent markets from sending genuine supply and demand signals, and will introduce other extra transaction costs.
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  The Economics of Bubbles [Pure Pedantry]

  http://scienceblogs.com/purepedantry/2008/05/the_economics_o...
  68 days ago in ScienceBlogs · Authority: 8

  The WSJ has a fascinating article on the economics of bubbles and why it might be rational to support a bubble until it bursts: Bubbles often keep inflating despite cautions such as Mr. Greenspan's famous warning of "irrational exuberance." Tech stocks rose for more than three years after he said that, in late 1996. Markus Brunnermeier, 39, thinks he understands why this happens. Growing up near Munich, Germany, he expected to become a carpenter like his father. A building slump dissuaded him, and after stints in a tax office and the army he enrolled at the University of Regensburg. Read the rest of this post... | Read the comments on this post...
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  They Took Our Jobs!

  http://www.openmarket.org/2008/05/16/they-took-our-jobs/
  68 days ago in OpenMarket.org · Authority: 217

  This Wall Street Journal article about Ben Bernanke’s “Bubble Laboratory” is a fascinating look at economic bubbles and the changing nature of the Federal Reserve Board. But what caught my eye was that the three economists selected by Bernanke to research and advise on this topic are all immigrants. Does anyone think that Americans are made poorer because these immigrants are “took our jobs?”

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