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Saturday, March 19, 2011

Sniffing Out Bubbles

DIY Investor is often asked about bubbles. It's almost as if the country has bubbles on the brain. Today, after every big market collapse, people knowingly wag their fingers and proclaim that it was a bubble waiting to burst. We've had the internet bubble and the housing bubble. Now the sport du jour is identifying future bubbles.

One likely participant who has publicly bowed out was former Federal Reserve Chairman Alan Greenspan. Unfortunately, he was the one person who could have saved the country considerable pain by simply raising margin requirements a bit as the stock market went on a moonshot over the 1995-1999 period or even just stepping in with a cautionary word on derivatives as housing prices were gaping higher in 2005. But the "maestro" said he couldn't identify bubbles and that it was better to clean up after they burst rather than nip them in the bud.

Today any investment or, for that matter, economy that takes off brings out the bubble seekers. Two prominent examples are gold and China. Gold, of course, has gone on a moon shot and China's economy has grown at a high rate that is clearly unsustainable. In fact, high rise unoccupied buildings, typically a harbinger of bubbles, are going up in China .

Boombustology: Spotting Financial Bubbles Before They Burst
A recent book by Yale professor Vikram Mansharamani brings together a number of disciples to bear on the problem of identifying bubbles. DIY Investor has not yet read the book but notes from the reviews that it looks promising and will produce a review in the near future.

For those who can't wait, you may want to check out the interview at Yahoo Finance.

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