The lesson for diagnosing a bubble

Tim Harford in The Financial Times

Here are three noteworthy pronouncements about bubbles. 

“Prices have reached what looks like a permanently high plateau.” That was Professor Irving Fisher in 1929, prominently reported barely a week before the most brutal stock market crash of the 20th century. He was a rich man, and the greatest economist of the age. The great crash destroyed both his finances and his reputation. 

“Those who sound the alarm of an approaching . . . crisis have somewhat exaggerated the danger.” That was a renowned commentator who shall remain nameless for now. 

“We are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.” That was investor Jeremy Grantham on January 3 this year. The normally bearish Mr Grantham mused that while shares seem expensive, historical precedents make it plausible that the S&P 500 will soar from present levels of around 2,700 to more than 3,500 before the crash occurs. 

Mr Grantham’s speculation is striking because he has tended to be a savvy bubble watcher in the past. But as any toddler can attest, it is not an easy thing to catch one before it bursts. 

There are two obvious ways to diagnose a bubble. One is to look at the fundamentals: if the price of an asset is unmoored from the cash flow it is likely to generate, that is a warning sign. (It is anyone’s guess what this implies for bitcoin, an asset that has no cash flow at all.) 

The other approach is to look around: are people giddy with excitement? Can the media talk of little else? Are taxi drivers offering stock tips? 

At the moment, however, these two approaches tell a different story about US stocks. They are expensive by most reasonable measures. But there are few other signs of speculative mania. The price rise has been steady, broad-based and was hardly the leading news of 2017. Given how expensive bonds are, it is hardly a surprise that stocks also seem pricey. No wonder investors and commentators are unsure what to say or do. 

It seems all so much easier with hindsight: looking back, we can all enjoy a laugh at the Extraordinary Popular Delusions and the Madness of Crowds, to borrow the title of Charles Mackay’s famous 1841 book, which chuckles at the South Sea bubble and tulip mania. 

Yet even with hindsight things are not always clear. For example, I first became aware of the incipient dotcom bubble in the late 1990s, when a senior colleague told me that the upstart online bookseller Amazon.com was valued at more than every bookseller on the planet. A clearer instance of mania could scarcely be imagined. 

But Amazon is worth much more today than at the height of the bubble, and comparing it with any number of booksellers now seems quaint. The dotcom bubble was mad and my colleague correctly diagnosed the lunacy, but he should still have bought and held Amazon stock. 

Tales of the great tulip mania in 17th-century Holland seem clearer — most notoriously, the Semper Augustus bulb that sold for the price of an Amsterdam mansion. 

“The population, even to its lowest dregs, embarked in the tulip trade,” sneered Mackay more than 200 years later. 

But the tale grows murkier still. The economist Peter Garber, author of Famous First Bubbles, points out that a rare tulip bulb could serve as the breeding stock for generations of valuable flowers; as its descendants became numerous, one would expect the price of individual bulbs to fall. 

Some of the most spectacular prices seem to have been empty tavern wagers by almost-penniless braggarts, ignored by serious traders but much noticed by moralists. The idea that Holland was economically convulsed is hard to support: the historian Anne Goldgar, author of Tulipmania, has been unable to find anyone who actually went bankrupt as a result. 

It is easy to laugh at the follies of the past, especially if they have been exaggerated for the purposes of sermonising or for comic effect. Charles Mackay copied and exaggerated the juiciest reports he could find in order to get his point across. Then there is the matter of his own record as a financial guru. That comment, this time in full, “those who sound the alarm of an approaching railway crisis have somewhat exaggerated the danger”, was Mackay himself, writing in the Glasgow Argus in 1845, in full-throated support of the idea that the railway investment boom of the time would return a healthy profit to investors. It was, instead, a financial disaster. In the words of mathematician and bubble scholar Andrew Odlyzko, it was “by many measures the greatest technology mania in history, and its collapse was one of the greatest financial crashes”. 

Oddly, Mackay barely mentions the railway mania in subsequent editions of his book — nor his own role as cheerleader. This is a lesson to us all. It’s very easy to scoff at past bubbles; it is not so easy to know how to react when one may — or may not — be surrounded by one.

Momentum, a convenient sporting myth

Suresh Menon in The Hindu

So Australia has the “momentum” going into the final Test match in Dharamsala.

At least, their skipper Steve Smith thinks so. Had Virat Kohli said that India have the momentum, he would have been right too. The reason is quite simple. “Momentum” does not exist, so you can pour into the word any meaning you want. Sportsmen do it all the time. It is as uplifting as the thought: “I am due a big score” or “the rivals are due a defeat”. Sport does not work that way, but there is consolation in thinking that it does.

“Momentum” is one of our most comforting sporting myths, the favourite of television pundits and newspaper columnists as well as team coaches everywhere. It reaffirms what we love to believe about sport: that winning is a habit, set to continue if unchecked; that confidence is everything, and players carry it from one victory to the next; and above all, that randomness, which is a more fundamental explanation, is anathema. It is at once the loser’s solace and the winner’s excuse. Few streaks transcend random processes. Of course streaks occur — that is the nature of sport. But that is no guide to future  performance.

Momentum, momentum, who’s got the momentum? is a popular sport-within-a-sport. It is a concept that borders on the verge of meaning, and sounds better than “I have a feeling about this.”

A study in the 1980s by Thomas Gilovich and Amos Tversky raised the question of “hot hands” or streaks in the NBA. They studied the Philadelphia 76ers and found no evidence of momentum. Immediate past success had no bearing on future attempts, just as a coin might fall heads or tails regardless of what the previous toss might have been.
That and later studies — including the probability of the winner of the fourth set winning the fifth too in tennis — confirmed what a coin-tossing logician might have suspected: that momentum, like the unicorn, does not exist.

Statistics and mythology are strange bedfellows, wrote the late Stephen Jay Gould, evolutionary biologist and baseball fan. One can lead to the other over the course of an entire series or even through a single over in cricket.

Gould has also explained the attraction of patterns, and how we are hard-wired to see patterns in randomness. In many cases, patterns can be discerned in retrospect anyway, but only in retrospect. “Momentum” is usually recognised after the event, and seems to be borne of convenience rather than logic.

The momentum in the current series was with India before the matches began. Then they lost the first Test in Pune, and the momentum swung to Australia for the Bengaluru Test which then India won, grabbing the momentum again.

The third Test was drawn, so the momentum is either with Australia for plucking a draw from the jaws of defeat or with India for pushing Australia to the edge. Such simplistic analyses have kept pundits in business and given “momentum” a respectability and false importance in competitive sport. There is something romantic too in the idea, and many find that irresistible.

Momentum is such a vital component of sport that it has assumed the contours of a tangible object. Fans can reach out and touch it. Teams have it, they carry it, they ride it, they take great comfort from it and work hard to ensure that the opposition does not steal it from them. They carry it from venue to venue like they might their bats and boots and helmets.

To be fair to Steve Smith, what he actually said was “If there’s anything called momentum, it’s with us at the moment,” giving us a glimpse into a measured skepticism. If it exists, then we have it.

Does Peter Handscomb have momentum on his side, after a match-saving half-century in Ranchi? By the same token, does Ravindra Jadeja, after a half-century and nine wickets in the same match? Is team momentum the sum total of all the individual momentums? Will Ravi Ashwin, in that case, begin the final Test with a negative momentum having been less than at his best on the final day in Ranchi? How long before someone decides that momentum is temporary, but skill is permanent?

It is convenient to believe that either one team or the other has the momentum going into the final Test. Yet it is equally possible that those who swing the match with their performance might be players who haven’t been a great success in the series so far.

Someone like fast bowler Pat Cummins, or Virat Kohli himself. A whole grocery list of attributes then becomes more important than momentum: motivation, attitude, desperation, and imponderables that cannot be easily packaged and labeled.

Whichever team wins, momentum will have nothing to do with it. But that will not stop the next captain from telling us that the momentum is with his side. It might seem like blasphemy to disagree with him, so deeply is the concept grouted into our sporting consciousness.

Cricket: Step in before its too late

Michael Jeh in Cricinfo

Unless the umpires step in quickly and end the talk, we could have a repeat of Monkeygate © Getty Images

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As a dramatic year in cricket draws to a close, I am reminded of the great philosopher Sophocles, who wrote in Oedipus Rex: "I have no desire to suffer twice, in reality and then in retrospect." He speaks cryptically of hindsight, that priceless tool of wisdom. But to use hindsight as a convenient excuse for not being prescient is sometimes the domain of fools and knaves.

A year ago, the television coverage of the Boxing Day Test was blighted by a skit that had nothing going for it, even with the wisdom of hindsight. At the time, a long time before the tragedy of Phillip Hughes could ever have been forecast, I wrote in scathing tones about the gross stupidity of one of the world's fastest bowlers hurling bouncers at an unarmed, unskilled participant with half the Channel Nine commentary crew standing around giggling. We didn't need an accidental death to tell us that Brett Lee bowling deliberate no-balls at talk-show host Piers Morgan, following him with short balls aimed at his head as he backed away to square leg, to the cackling of Shane Warne, Michael Slater and Michael Vaughan, with Mitchell Johnson and Craig McDermott watching on is just plain negligence on the part of all parties involved. These were the same people who visited Hughes in hospital, cried at his funeral and shook their heads in disbelief at the sheer bad luck of it.

Did it not occur to them that bowling no-balls at the body of an unskilled batsman might just have ended in tragedy? Did it take the death of a skilled batsman, a professional cricketer, early on a hook shot, for all those involved with The Cricket Show to reflect on the utter inappropriateness of this stunt? This from a programme that unashamedly targets young viewers (and does it extremely well in that genre).

To be fair, you only have to read some of the comments on that article of mine to see that this brain fade wasn't the exclusive domain of these star cricketers, production staff and medicos. Clearly many of the respondents, perhaps fuelled by a dislike of Morgan, did not have the foresight to imagine the sort of injury that could so easily have befallen the batsman (if indeed that can be called "batting"). Don't believe how bad it looks in hindsight? Find Brett Lee v Piers Morgan on Youtube. Ask anyone involved in planning, executing or being a bystander to this stunt if they would be willing to participate in something similar this year, perhaps getting a speedster like Pat Cummins to try and hit another celebrity in the head (and not even having the decency to bowl from behind the white line)? Any takers for a repeat show?

A series that has showcased so much high-octane cricket in the dignified shadow of Hughes' memory doesn't deserve to be remembered for all the wrong reasons

While on the "should have known better" theme, both teams involved in the current series need to look at the so-called "banter" being exchanged. With the IPL friendships that now exist, you'd think the Indians would have worked out that it rarely works to sledge an Aussie fast bowler. Where was the upside to poking a dormant brown snake? One can understand the tactic if Mitchell Johnson had been running rampant and they were looking for anything to put him off his game. Instead, for a brief but telling period in Brisbane, they riled him to the point where he not only scored 88 and turned a sizeable deficit into a crucial lead but then came out and blasted out the Indian top order. That Rohit Sharma was in the thick of it defies belief - here's a bloke on the verge of being dropped himself, having done very little in the series, taunting Johnson about his lack of impact. The only impact we are likely to see from Rohit for the rest of the series was Hot Spot on the edge of his bat as he was fired out for nought.

Shane Watson belongs in the same camp; he is never far from a chat, but for a player who continues to polarise even the staunchest Australian fans, he might be better advised to leave the verbals alone and try to convince the nation that he is a budding allrounder - if only he could learn to bat. How much hindsight is required to convince the selectors that he is not the answer at first drop? They might work on the reverse-hindsight theory - keep giving him enough chances until he makes a score and that vindicates the selection.

The Australians, too, need to rethink their targeting of Virat Kohli. Abrasive he may be, hot-headed he is, but by Jove, the boy can bat. Baiting him doesn't work, it just brings out the mongrel in him. He had to score three hundreds this series to underscore the futility of that tactic? His habit of spoiling for a scrap, regardless of whether it's his fight or not, will see him miss a Test soon for disciplinary reasons. You don't need 20/20 vision to predict that!

Ian Chappell, who knows a thing or two about playing tough cricket, has long been cautioning the ICC about allowing the incessant chatter to get to the point where someone gets too hot under the collar and a physical confrontation leaves an indelible stain on a game that is in an awkward no-man's land after the sombre events of the recent past. It is not enough to leave it up to the players to decide where that fine line is between banter, gamesmanship and that final sledge that sparks an unseemly confrontation. The umpires in this series have been far too lax in allowing the players the latitude of walking that fine line - the palpable tension after tea on day four in Melbourne threatens to descend into open warfare unless the umpires take more control.

A series that has showcased so much high-octane cricket in the dignified shadow of Hughes' memory doesn't deserve to be remembered for all the wrong reasons. The ghosts of that ugly series in 2007-08 do not need to be dug up from their uneasy graves. This is not a lesson we need to learn, again, in hindsight.

It is probably incumbent upon the match referee to gather both teams together at close of play and remind them that some situations, like the Monkeygate affair, are too hard to retrieve if tensions run too high. It would make a mockery of all the goodwill that has flowed through the cricket community in the wake of sadness, black armbands and moving eulogies. He might do well to remind them all of this old Irish proverb: "May you have the hindsight to know where you've been, the foresight to know where you're going and the insight to know when you're going too far."

Why do we take economists so seriously?

They have no foresight, no hindsight, and little humanity. Are they really the best people to lead us out of this crisis?

• 
• guardian.co.uk, Wednesday 6 June 2012 20.02 BST

The unemployed people bussed in to work as stewards at the jubilee – a sign of the scale of inequality in the west? Photograph: Shiv Malik for the Guardian

It's the economists, stupid! While we were not waving but drowning in soggy flags, economic stuff was happening. Big stuff, though it could not break through the gooey queen-fest. In the news blackout that was the jubilee, other countries were reporting the meltdown of the Spanish banks, and thus, eventually, the euro. Obama was on the phone to Cameron telling him to do something about Merkel. It's all pretty dire. It must be for me to understand it, for though I am not an economist, I know what I like. Some sort of stimulus, please. Fiscal will do nicely.

Actually, that may happen. Another £50bn could be pumped into the economy soon. Money does not grow on trees, you know. Except when it is called quantitative easing.

Why all this panic, though? Aren't economists in charge of it all? Yes. And this is the problem. These highly skilled people carry on, though they exhibit not only a lack of foresight but an astonishing lack of hindsight. Why on earth are they taken seriously when they keep getting things wrong? We are silenced by some jargon and bogus maths (sorry, probabilities) because we are mostly innumerate and because economic orthodoxy presents itself as a higher faith. I am not the only person uncertain as to what a trillion means, surely? It was explained to me in terms of time. A million is a few seconds, a trillion is 30 years – it's a lot of wonga.

The sudden ability to produce money out of thin air is exactly why economists such as Paul Krugman tell us that the Thatcher-lite hausfrau-speak of Osborne is senseless. The deficit is not like household debt, because if it was, I could go mad in Morrisons, go to the till promising to pay later and they would still give me cashback.

But we are indeed in reduced circumstances when debate is reduced to bankers arguing with economists. This clash of ideologies is not really left versus right. It is more akin to fundamentalists talking to agnostics. To be an austerity groupie, one has to ignore the actual behaviour of people; to believe fervently in Keynes, one has to ignore the behaviour of politicians.

Economics is not a science; it's not even a social science. It is an antisocial theory. It assumes behaviour is rational. It cannot calculate for contradiction, culture, altruism, fear, greed, love or humanity at all.

Sure, there are some new radicals on the block who daringly suggest that we should not adhere to the old models. We end up then with these money wizards shouting at each other on Newsnight while novelists such as John Lanchester translate for us. Only non-economists properly explain that money is not real and what was traded during the boom years were not real things, not even real futures, but guesstimates of futures bundled into some bizarre equation where no one at the top could lose. Gamblers always made money, but it became possible to make money without risking your own. It was risk, not wealth, that trickled down, so those without jobs could buy houses soon to be repossessed.

Risk-free capitalism was what the anti-globalisers always warned us about, but they had dreadlocks and dogs on string and were pepper-sprayed away. What they misjudged was how quickly developed countries would come to look like underdeveloped ones: the scale of inequality in "the west". In the US there are the incredibly wealthy and then those who sleep in the woods on the edge of broken cities; here, the unemployed are bussed in to "steward" the celebration of the billionaire monarch.

This is economic sense as it is practised by the deliberately dumb, those who bow down before the calculation that we can have even Spanish levels of youth unemployment (40%-50%) if it reduces the deficit by the next election. Meanwhile, if you have a job, do save up for your pension, because they have gone down the pan.

Some of the free-market economists are right, but politicians can't go there. The free movement of capital really requires the free movement of labour. Go where the jobs are, but do not complain when immigration undercuts your wage.

Do not complain either when economists and government ministers tell you that what you thought had a social purpose must now be profit-driven. Money must be made from schools, hospitals and looking after the elderly. The privatisation of care is one of the only growth industries. This is what you get from this dictatorship of economists, and it should be overthrown. It is wrong and keeps being wrong. The choices to be made now are moral, not economic ones. Only an idiot or an economist would think otherwise.