WEBVTT - This Is How You Know When the Stock Market Is in a Bubble 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T from transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.480 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:27.000 T dot com put Knowledge to Work. Hello and welcome 0:00:27.040 --> 0:00:30.560 to another episode of the Odd Lots podcast. I'm Joe 0:00:30.600 --> 0:00:34.280 Wisenthal and I'm Tracy Alloway. So, Tracy, I have to 0:00:34.320 --> 0:00:36.680 admit I have a I have a certain pet peeve 0:00:36.880 --> 0:00:41.840 about other financial journalists, just one, actually a lot. Haven't 0:00:41.840 --> 0:00:45.080 you been complaining that I've been attacking financial media too much, 0:00:45.120 --> 0:00:48.320 like work and stuff like that. Well, yes, good, because 0:00:48.360 --> 0:00:51.840 now I have an entire set up to an episode 0:00:51.880 --> 0:00:55.640 that's basically me just venting about other people in our field. 0:00:55.840 --> 0:00:58.560 This is exactly what I wanted, now, you know. It 0:00:58.600 --> 0:01:02.200 really annoys me. The prevalent of people to say that 0:01:02.240 --> 0:01:06.800 there's a bubble in everything. Journalists are always calling things 0:01:06.959 --> 0:01:09.600 a bubble. If you go back to any market at 0:01:09.640 --> 0:01:13.560 any time, you could probably find someone who's like stroking 0:01:13.600 --> 0:01:16.400 their chin and trying to sound smarter and more wise 0:01:16.440 --> 0:01:18.240 than everyone else and saying, oh, this is a bubble. 0:01:18.319 --> 0:01:21.200 Looks like to me because they want to be the wise, 0:01:21.280 --> 0:01:24.920 skeptical one that didn't get caught up in the hype. Right, Okay, 0:01:25.040 --> 0:01:27.600 I mean I get the complaint, But isn't that sort 0:01:27.640 --> 0:01:30.360 of like our goal in life is to be the 0:01:30.440 --> 0:01:35.759 watchdogs with the potential like disaster scenario always ready at hand. 0:01:36.480 --> 0:01:39.399 Shouldn't we be warning people? We should be. I think 0:01:39.440 --> 0:01:41.959 we should be judiciously warning people. But I mean the 0:01:41.959 --> 0:01:45.280 goal should be right, to be right, not necessarily, and 0:01:45.720 --> 0:01:50.440 there are other ways to express concerns about development rather 0:01:50.480 --> 0:01:54.720 than immediately say bubble. Okay, I'm with you that the 0:01:54.880 --> 0:01:59.200 term bubble might be overused. Yes, the big said, it's 0:01:59.320 --> 0:02:02.880 kind of a timely now because you know, just talking 0:02:02.880 --> 0:02:05.560 about the stock market, the stock market is at the 0:02:05.800 --> 0:02:08.880 highest level, very close to its all time highest levels. 0:02:09.440 --> 0:02:14.640 Many traditional valuation measures are arguably stretched, and there was 0:02:14.680 --> 0:02:17.840 a survey recently done that showed Americans are more bullish 0:02:17.880 --> 0:02:20.440 about the stock market than they have been at any 0:02:20.520 --> 0:02:24.200 time since the tech bubble. Right, Americans and also their 0:02:24.280 --> 0:02:27.920 fund managers. Right, everyone seems to be super optimistic at 0:02:27.919 --> 0:02:31.040 the moment, exactly, at least about equities. Yeah, at least 0:02:31.040 --> 0:02:34.680 about stocks. And you know, there's that just that alone 0:02:34.760 --> 0:02:39.040 would be caused for some reason to perhaps be concerned. 0:02:39.160 --> 0:02:41.120 But then you know, you sort of layer on top 0:02:41.160 --> 0:02:45.120 of that the sort of volatile political environment, and you 0:02:45.200 --> 0:02:48.480 certainly have a lot of people right now who are 0:02:48.639 --> 0:02:51.799 starting to throw around the B word again regards to 0:02:51.840 --> 0:02:56.040 stocks words. But I mean, when you hear a statistic 0:02:56.080 --> 0:02:59.280 like people are the most positive on stocks since the 0:02:59.360 --> 0:03:02.840 year two thousand, you immediately remember what happened in the 0:03:02.919 --> 0:03:05.840 year two thousand or shortly after, right, No, you have 0:03:05.919 --> 0:03:09.400 to immediately say, well, that might be a bad contrarian signal. 0:03:09.760 --> 0:03:13.440 But rather than just speculate, and rather than just throw 0:03:13.520 --> 0:03:16.839 out random statistics that say, oh, scary, the last time 0:03:16.880 --> 0:03:21.120 this happened, markets plunged right afterwards. How about we actually 0:03:21.160 --> 0:03:25.320 talked to someone who's expertise is in identifying when the 0:03:25.360 --> 0:03:27.480 market is in a bubble or not. You sure you 0:03:27.520 --> 0:03:29.840 don't just want to like stroke your chin. We could 0:03:30.120 --> 0:03:32.440 and pontificate. We could do that a few more minutes 0:03:32.440 --> 0:03:34.200 that I can just ran some more, But I don't know, 0:03:34.240 --> 0:03:36.000 Maybe we should actually talk to someone who knows what 0:03:36.040 --> 0:03:38.200 they're talking about. Okay, let's do it. Who is it? 0:03:38.360 --> 0:03:41.680 So today we're going to be talking to Robin Greenwood, 0:03:41.720 --> 0:03:45.960 He is a professor at Harvard Business School, and as 0:03:46.040 --> 0:03:49.680 part of his research, he looks into what are the 0:03:49.800 --> 0:03:54.400 true characteristics of stock price bubbles? What do they have 0:03:54.440 --> 0:03:58.640 in common? How do you distinguish between what is a 0:03:58.720 --> 0:04:03.400 bubble and what's just a rising boom? He sounds perfect. 0:04:03.480 --> 0:04:15.839 Let's bring him on. He is perfect. Robin Greenwood, thank 0:04:15.880 --> 0:04:18.239 you very much for joining us. Hi, Joe, Hi, Tracy. 0:04:18.880 --> 0:04:22.680 So let's just start with a question, is why is 0:04:22.720 --> 0:04:25.520 it so hard to call bubbles? People? As we were 0:04:25.560 --> 0:04:28.680 just talking about, people do it all the time. Sometimes 0:04:28.720 --> 0:04:31.000 it seems really obvious that something must be in some 0:04:31.560 --> 0:04:36.400 irrational price. Actually, you know what, here's the question, now, yeah, 0:04:36.520 --> 0:04:40.240 why is it? What's so okay? Here's my question? What 0:04:40.440 --> 0:04:43.560 is a bubble? People throw this word around and Tracy 0:04:43.600 --> 0:04:46.400 and I probably mentioned at fifteen times in the intro, 0:04:46.960 --> 0:04:51.320 but what is a bubble? So it's funny that you 0:04:51.320 --> 0:04:55.000 you were talking about journalists and how regularly they're they're 0:04:55.000 --> 0:04:58.479 willing to use the word bubble Among economists, bubble is 0:04:58.520 --> 0:05:01.120 actually somewhat of a four letter word. I mean, I 0:05:01.160 --> 0:05:02.880 can't tell you the number of times that I've been 0:05:02.880 --> 0:05:06.919 in conversations with other economists and describe something as a 0:05:06.920 --> 0:05:09.000 potential bubble, and they say, what do you mean, what's 0:05:09.000 --> 0:05:13.040 a bubble? That it's a bubble um, there's no such 0:05:13.080 --> 0:05:15.440 thing as a bubble. And in fact, that idea is 0:05:15.800 --> 0:05:18.520 pretty well encapsulated by the most recent one of the 0:05:18.520 --> 0:05:22.200 most recent Nobel Prize winners, Gene Fama, who has famously 0:05:22.240 --> 0:05:24.560 said in lots of different outlets that there's really no 0:05:24.640 --> 0:05:28.039 such thing as a bubble. And I think that the 0:05:28.120 --> 0:05:33.200 starting point for many economists is that it's easy to 0:05:33.200 --> 0:05:36.839 say after the fact that something has crashed, or that 0:05:36.920 --> 0:05:39.400 something has run up and then crashed, But in fact 0:05:39.440 --> 0:05:42.880 it's not really very meaningful to describe something after the fact. 0:05:42.920 --> 0:05:44.480 You really want to be able to say something, as 0:05:44.480 --> 0:05:48.960 you point out, before the fact, before the crash. And 0:05:49.839 --> 0:05:52.280 so I think people have in mind lots of different 0:05:52.839 --> 0:05:56.279 concepts when they talk about bubble. We actually defined in 0:05:56.279 --> 0:06:00.240 our work. We made a very uh specific decis vision 0:06:00.320 --> 0:06:03.360 too to have a narrow concept of a bubble, which 0:06:03.440 --> 0:06:06.599 is a very rapid price run up followed by a crash. 0:06:06.640 --> 0:06:10.800 So really, thank dot com stocks, that was our idea. 0:06:11.080 --> 0:06:15.479 Let's try to understand episodes that are like that. So 0:06:15.760 --> 0:06:19.680 someone in the investment industry once told me that another 0:06:19.880 --> 0:06:23.799 term for a bubble that hasn't crashed is a really 0:06:23.839 --> 0:06:28.520 good good bull run. Right, Um, so when you look 0:06:29.080 --> 0:06:33.599 at your definition of bubbles, how many how many actual 0:06:33.600 --> 0:06:37.239 bubbles do you count versus how many really good bull 0:06:37.320 --> 0:06:40.720 runs that haven't ended with a crash? Great? Yes, So 0:06:40.760 --> 0:06:43.400 we looked in history and we looked at industries. And 0:06:43.440 --> 0:06:46.200 the reason we looked at industries was because in many 0:06:46.240 --> 0:06:48.680 of these run ups, like dot com and in the 0:06:48.720 --> 0:06:52.839 nineteen twenties, there's this huge industry component. So for example, 0:06:52.880 --> 0:06:55.760 not every industry went up in the late nineteen nineties. 0:06:56.560 --> 0:06:59.440 So that said, we're looking at these price run ups, 0:06:59.480 --> 0:07:03.480 we only find forty since the nineteen twenties in the US, 0:07:03.560 --> 0:07:06.839 and roughly half of those crash. And then we also 0:07:06.920 --> 0:07:10.000 look at thirty four countries back to the nineteen eighties, 0:07:10.600 --> 0:07:15.320 and we identified a hundred and seven episodes and essentially 0:07:15.360 --> 0:07:19.320 find identical findings there, which is to say that about 0:07:19.360 --> 0:07:23.000 half of those crash as well. Now, one of the 0:07:23.240 --> 0:07:26.040 challenges in one of the reasons this is such an 0:07:26.080 --> 0:07:29.520 important and difficult question, and I want to next get 0:07:29.560 --> 0:07:32.320 to the sort of common characteristics of all these bubbles. 0:07:32.320 --> 0:07:35.000 But one of the reasons why it's such a important 0:07:35.080 --> 0:07:38.960 question is that calling a bubble is a very difficult 0:07:39.000 --> 0:07:43.080 thing for investors and can often be harmful to one's career, 0:07:43.200 --> 0:07:49.040 even if correct. So one might have identified in that 0:07:49.200 --> 0:07:51.880 internet stocks were in a bubble, but you might have 0:07:51.920 --> 0:07:56.800 gone broke between and March of two thousand, either shorting 0:07:56.800 --> 0:07:58.760 the market in which you would have been destroyed or 0:07:58.760 --> 0:08:01.840 avoiding the market. Inch case, perhaps all of your investors 0:08:01.960 --> 0:08:03.800 might have taken their money out of you and gone 0:08:03.800 --> 0:08:07.480 with some other manager. Yes, so, Joe, that observation we 0:08:07.600 --> 0:08:10.840 found in the data in all of these historical episodes. 0:08:11.360 --> 0:08:14.040 So even in the cases where you were right, so 0:08:14.280 --> 0:08:16.520 meaning we had this price run up, we said it's 0:08:16.520 --> 0:08:20.840 a bubble, it's gonna crash, and it ultimately did crash, 0:08:21.320 --> 0:08:26.120 we actually were off by five months on average, meaning 0:08:26.360 --> 0:08:29.000 that subsequent of the price run up, actually prices continue 0:08:29.040 --> 0:08:31.400 to run up an average of an additional five months 0:08:31.520 --> 0:08:36.880 and go up by an average of about So imagine 0:08:36.880 --> 0:08:39.040 you're short the tech bubble, and the tech bubble it 0:08:39.080 --> 0:08:42.680 was worse because if you used our signal, you would 0:08:42.720 --> 0:08:48.080 have been short starting in March, and you know you 0:08:48.120 --> 0:08:51.320 would you would have lost everything just being short through 0:08:51.360 --> 0:08:54.679 April of two thousand, but more generally, if you look 0:08:54.679 --> 0:08:57.240 across episodes, you would have been off by at least 0:08:57.240 --> 0:09:01.920 five months. Mhm um. In your research, did you find 0:09:01.960 --> 0:09:07.199 anything that suggests what the catalysts are for an actual 0:09:07.280 --> 0:09:10.520 crash to occur in a bubble, Because, as we've just 0:09:10.559 --> 0:09:13.640 been discussing, you know, if it's not a bubble, it's 0:09:13.679 --> 0:09:16.080 a bull run that just goes on for a long 0:09:16.080 --> 0:09:18.680 long time. So what is the actual thing that tips 0:09:18.720 --> 0:09:23.559 it over? So the thing we did not investigate and 0:09:23.800 --> 0:09:28.439 we are looking at now is the exact timing and 0:09:28.480 --> 0:09:33.360 how it What are the characteristics around the crash um 0:09:33.440 --> 0:09:36.240 that might help you be a really good timer of 0:09:36.240 --> 0:09:40.280 of that crash. What we did instead was say, we've 0:09:40.320 --> 0:09:43.160 got these forty episodes. You know, whether it was the 0:09:43.280 --> 0:09:46.240 utilities in the twenties or the dot com stocks or 0:09:46.280 --> 0:09:50.880 healthcare stocks in nighties, what are the characteristics of that 0:09:50.960 --> 0:09:56.920 price run up? You know, extra speculation, volatility, issuance, a 0:09:57.000 --> 0:10:00.920 new paradigm, all that kind of stuff doesn't help us 0:10:00.960 --> 0:10:04.680 forecast which of the episodes are going to ultimately crash. 0:10:04.920 --> 0:10:10.240 And there there we found I think pretty useful evidence 0:10:10.280 --> 0:10:12.760 that you can predict, at least to some extent, which 0:10:12.800 --> 0:10:16.520 of those episodes are going to crash. So let's talk 0:10:16.559 --> 0:10:20.280 about some of these attributes. You identify a few very 0:10:20.320 --> 0:10:24.120 specific things that all these bubbles that crashed have in coming, 0:10:24.160 --> 0:10:26.800 Why don't you tell us what a few of them are. Short. 0:10:27.080 --> 0:10:30.720 One of the things that we found was a new 0:10:30.960 --> 0:10:35.439 a new characteristic we called acceleration. An acceleration really means 0:10:35.480 --> 0:10:38.959 that if the price has been going up even faster 0:10:40.160 --> 0:10:45.120 more recently, that's a good sign of a potential crash. 0:10:45.400 --> 0:10:48.319 The other thing we looked at was issuance, so for example, 0:10:48.400 --> 0:10:51.000 lots of new firms coming online I P O S 0:10:51.400 --> 0:10:58.719 so thick, also twenties um. And then finally, one of 0:10:58.720 --> 0:11:02.000 the things we looked at was new firms versus old firms, 0:11:02.080 --> 0:11:06.560 So a lot of these episodes involved new new firms. 0:11:06.760 --> 0:11:10.280 In fact, this is less well known, but the bubble 0:11:10.280 --> 0:11:13.760 in the nineteen twenties was largely around the electrification of America. 0:11:13.840 --> 0:11:18.760 So in nineteen twenty there were thirty of households had electricity. 0:11:18.800 --> 0:11:23.040 By the end of that decade, it was there was 0:11:23.160 --> 0:11:26.160 the same kind of hype about electrification that we had 0:11:26.160 --> 0:11:28.559 abound dot com, and so we said, well, let's try 0:11:28.600 --> 0:11:33.120 to measure kind of the novelty of the industry at 0:11:33.120 --> 0:11:35.840 this time and whether there's a way to link that 0:11:35.880 --> 0:11:40.120 to the crash probability. Wait, I have a personal anecdote 0:11:40.200 --> 0:11:44.840 that I just remembered. No, no, I don't think I've 0:11:44.880 --> 0:11:48.160 ever told you that. It just I actually have very direct, 0:11:48.280 --> 0:11:51.080 relevant personal anecdote that I just remembered that relates to this. 0:11:51.559 --> 0:11:56.400 So it was and I was, I think a freshman 0:11:56.520 --> 0:11:58.640 or sophomore in college, and I like traded stocks a 0:11:58.679 --> 0:12:02.280 little bit with some money that I made for a 0:12:02.280 --> 0:12:06.240 summer job, and I invested in this company called Spyglass, 0:12:06.600 --> 0:12:10.640 which was a company that made uh software for TVs 0:12:10.679 --> 0:12:13.040 and phones to connect to the Internet, and they actually 0:12:13.080 --> 0:12:15.920 like had revenues in real business, but the stock didn't 0:12:15.960 --> 0:12:19.760 go anywhere. And then there's other company called Liberate Technology, 0:12:19.800 --> 0:12:23.040 which was actually an Oracle spinoff, did the exact same thing, 0:12:23.640 --> 0:12:25.880 and they had almost no revenue or anything, but that 0:12:25.960 --> 0:12:29.840 stock went nuts, and I I just remember this. It 0:12:29.880 --> 0:12:33.040 seems like a good example of people. Spyglass had been 0:12:33.040 --> 0:12:36.319 around traded for several years, it just traded like dead money, 0:12:36.480 --> 0:12:39.400 and Liberate when bananas and I couldn't understand the gap. 0:12:39.440 --> 0:12:42.720 But now hearing this, I'm reminded what you're exactly what 0:12:42.760 --> 0:12:44.800 you're saying, this sort of the fetish for the new 0:12:44.840 --> 0:12:47.920 company rather than the old, established one. Yeah, I think 0:12:48.320 --> 0:12:52.679 bubbles are sometimes about new companies and new industries. They're 0:12:52.720 --> 0:12:56.679 always about a new story, and that's something that's very 0:12:56.679 --> 0:13:00.760 hard to quantify because we're looking at all these episodes 0:13:00.760 --> 0:13:04.559 over essentially a hundred years of data, so we can't 0:13:04.679 --> 0:13:07.000 quantify that very well. But new industry is a way 0:13:07.000 --> 0:13:11.720 to get at that. I mean, on your dot Com experience, 0:13:12.880 --> 0:13:16.400 there was an amazing phenomena where just adding dot com 0:13:16.520 --> 0:13:21.920 to your stock name added seventy price to the to 0:13:22.040 --> 0:13:25.360 the stock price. So, Robin, you mentioned that when it 0:13:25.400 --> 0:13:29.400 comes to identifying actual bubbles, the acceleration of the price 0:13:29.480 --> 0:13:33.960 increases can be valuable or a valuable indicator and also issuance. 0:13:34.080 --> 0:13:38.120 Is it because of this same dynamic, because you basically 0:13:38.160 --> 0:13:40.400 just have a bunch of people jumping on the bandwagon. 0:13:41.080 --> 0:13:44.880 I think acceleration is measuring well, actually we're not sure 0:13:44.920 --> 0:13:48.040 what acceleration measures, but we think it might be related 0:13:48.080 --> 0:13:52.439 to people coming in and buying following the very high 0:13:52.679 --> 0:13:58.760 already prices and past returns. The issuance I would say 0:13:58.840 --> 0:14:03.160 is related to firms understanding it's great times that people 0:14:03.200 --> 0:14:05.320 want to buy stock and they just want to supply 0:14:05.440 --> 0:14:09.280 that stock. Why not. Um So, there's a lot of 0:14:09.760 --> 0:14:13.160 research already in finance showing that subsequent to a bunch 0:14:13.160 --> 0:14:16.040 of issuance, that returns are low. But the thing that 0:14:16.080 --> 0:14:18.800 we have that's new is combined with this massive price 0:14:18.880 --> 0:14:24.560 run up, it's a pretty good predictor of crash. But 0:14:24.720 --> 0:14:26.960 knowledge to work and grow your business with c i 0:14:27.040 --> 0:14:31.160 T from transportation to healthcare to manufacturing. C i T 0:14:31.320 --> 0:14:35.320 offers commercial lending, leasing, and treasury management services for small 0:14:35.400 --> 0:14:37.960 and middle market businesses. Learn more at c i T 0:14:38.160 --> 0:14:46.200 dot com put Knowledge to Work. You mentioned at the 0:14:46.240 --> 0:14:49.240 beginning of the episode that economists hate the word bubble, 0:14:49.400 --> 0:14:53.520 and I guess that's because economists and Joe no I 0:14:53.600 --> 0:14:55.240 like the word bubble. I just think that we should 0:14:55.280 --> 0:14:58.160 use it sparingly. But I've been forced to get rid 0:14:58.200 --> 0:15:01.480 of it that word in multiple things that I've written 0:15:01.520 --> 0:15:05.440 over the years. Isn't that just because so many economists 0:15:05.480 --> 0:15:08.760 more or less have an efficient markets view of the 0:15:08.800 --> 0:15:13.360 world that at any given moment, the markets are perfectly 0:15:13.400 --> 0:15:17.760 pricing in all information and bubble is too judgmental in 0:15:17.880 --> 0:15:21.560 terms of markets are getting something wrong. I think it's that, 0:15:21.640 --> 0:15:24.440 but I think it's also what you mentioned earlier, which 0:15:24.480 --> 0:15:26.960 is that we don't really have a clear definition of 0:15:27.000 --> 0:15:29.840 a bubble. So is it a big price run up 0:15:29.840 --> 0:15:34.720 followed by a crash? Is it just misspricing of some degree? 0:15:34.760 --> 0:15:37.480 So for example, if the stock market is miss priced 0:15:37.520 --> 0:15:42.000 by ten or is that a bubble or bonds of bubble? 0:15:42.040 --> 0:15:45.120 People don't really agree on the definition. And I think 0:15:45.200 --> 0:15:48.640 that's a strength of what we did was really fix 0:15:48.720 --> 0:15:52.160 a definition and then just see where it takes us. Tracy. 0:15:52.240 --> 0:15:54.240 It reminds me of like one of our episodes. We're 0:15:54.240 --> 0:15:56.680 talking about the definition of money, and we're talking about 0:15:56.680 --> 0:15:58.320 how any person on the street can tell you what 0:15:58.360 --> 0:16:00.800 money is, accept an economy miss who couldn't do it 0:16:00.840 --> 0:16:05.480 in a really hard question. The same thing as with bubbles. 0:16:05.520 --> 0:16:08.480 Anyone could sort of define it except an economist. So 0:16:08.600 --> 0:16:11.640 away from the definition's issue, which I have a feeling 0:16:11.640 --> 0:16:13.920 we could talk about for a while, I kind of 0:16:13.960 --> 0:16:16.960 have a structural question, which is it's really great to 0:16:16.960 --> 0:16:20.560 sit and talk about what a bubble actually is, but 0:16:20.720 --> 0:16:27.680 doesn't help anyone who's actually investing, because I remember, way 0:16:27.720 --> 0:16:30.840 back in the day, City Group had a really good 0:16:31.240 --> 0:16:33.720 definition of a bubble, which was that a bubble is 0:16:33.720 --> 0:16:37.320 an asset that I get fired for not owning. If 0:16:37.320 --> 0:16:41.320 you see, like if you see tex stocks accelerating by 0:16:41.360 --> 0:16:43.640 a hundred percent over the course of a year and 0:16:43.720 --> 0:16:46.880 you don't have those in your portfolio, someone's going to 0:16:47.000 --> 0:16:49.800 yell at you. Right, even if you think it might 0:16:49.800 --> 0:16:53.200 be a risky investment. How do you square that? I 0:16:53.240 --> 0:16:56.760 think you're raising a great set of questions about why 0:16:56.960 --> 0:17:00.280 these bubbles come to be in the first place. And 0:17:01.920 --> 0:17:04.320 to be fair, our research don't really doesn't really speak 0:17:04.359 --> 0:17:09.080 to that question. You know my opinion, I think what 0:17:09.160 --> 0:17:12.720 you're saying is exactly right. These very large price run ups, 0:17:12.760 --> 0:17:16.119 you actually have to participate. I actually did some work 0:17:16.240 --> 0:17:19.120 a few years ago looking at the tech bubbles specifically, 0:17:19.760 --> 0:17:21.600 and one of the things that we found there was 0:17:21.640 --> 0:17:24.840 that the we were looking at mutual fund managers, and 0:17:24.880 --> 0:17:28.160 we found that the old guard so mutual fund managers 0:17:28.240 --> 0:17:33.720 over we're essentially loath to get into the dot com 0:17:33.760 --> 0:17:37.359 stocks until the very end, So they actually performed very poorly. 0:17:38.119 --> 0:17:43.040 But the young, the young people were involved sort of 0:17:43.160 --> 0:17:46.200 right from the beginning. So I don't know if that's 0:17:46.240 --> 0:17:49.560 career incentives beliefs. We pushed the line that it was 0:17:49.600 --> 0:17:52.800 a lot driven by beliefs that you know, young people 0:17:52.840 --> 0:17:55.400 haven't experienced the crash. They don't say, well, we've seen 0:17:55.400 --> 0:17:59.000 this before, um, And we had some other evidence to 0:17:59.040 --> 0:18:01.239 support that view. I think it's probably a bit of 0:18:01.280 --> 0:18:04.919 both of beliefs and incentives, and it also sort of 0:18:05.080 --> 0:18:07.919 you know, people always talk about this, not necessarily with bubbles, 0:18:07.960 --> 0:18:11.480 what markets turn. When you talk about the final bears capitulated, 0:18:11.600 --> 0:18:15.080 the final bulls capitulate often being a sign of some 0:18:15.160 --> 0:18:19.280 sort of market turn. There's a very famous picture of 0:18:19.400 --> 0:18:24.720 Isaac Newton's holdings during the south Sea bubble, where he 0:18:25.800 --> 0:18:28.359 is in at the beginning, so when prices are low, 0:18:29.040 --> 0:18:33.520 he gets out when they rise by some extent, let's 0:18:33.520 --> 0:18:38.639 say it's and then prices keep rising and he's looking 0:18:38.640 --> 0:18:41.399 around and presumably all of his friends are making a 0:18:41.400 --> 0:18:43.600 lot of money, and he gets in again at the 0:18:43.680 --> 0:18:49.520 peace peak and um gets completely wiped out. I just 0:18:49.640 --> 0:18:51.840 googled this chart right now, I'm looking at it. It 0:18:51.960 --> 0:18:54.080 is pretty sad, and it really is sort of like 0:18:54.440 --> 0:18:58.000 the perfect emblem of if you if you searge Isaac 0:18:58.000 --> 0:19:00.680 Newton's South Sea Bubble, you'll immediately see the chart online 0:19:00.720 --> 0:19:04.639 and it perfectly describes the psychology of capitulating to a 0:19:04.680 --> 0:19:07.040 bubble at the worst possible times, both on the run 0:19:07.119 --> 0:19:11.560 up and the and the way down. You see this 0:19:11.720 --> 0:19:16.600 in the ships market actually, so if you go back 0:19:16.600 --> 0:19:20.040 to two thousand and eight, there was this incredible run 0:19:20.080 --> 0:19:24.080 up and ship prices so dry ball carriers, and if 0:19:24.080 --> 0:19:26.280 you look at the data, there was actually this little 0:19:26.320 --> 0:19:29.320 price run up in two thousand six two thousand seven, 0:19:30.240 --> 0:19:32.040 and a lot of people in the industry at the 0:19:32.080 --> 0:19:36.160 time said, wow, we've never seen price prices as high, 0:19:36.400 --> 0:19:39.520 and they got out and then prices went up a 0:19:39.600 --> 0:19:41.680 little bit more and they said, we must be wrong. 0:19:41.680 --> 0:19:46.919 It's a new paradigm. M So, I mean, but this 0:19:47.000 --> 0:19:49.800 kind of raises an important question, which is that are 0:19:49.840 --> 0:19:54.200 are we just our markets doomed to experience bubbles forever 0:19:54.600 --> 0:20:00.439 or will like we be able to inhibit human nature 0:20:01.160 --> 0:20:03.719 because to some extent, this is all about human nature, right, 0:20:03.760 --> 0:20:05.320 Like you don't want to miss out on the next 0:20:05.359 --> 0:20:09.919 big thing um, and you're fearful of of missing the 0:20:09.960 --> 0:20:15.160 big wave of price increases, so I think they're here 0:20:15.200 --> 0:20:18.520 to stay. There's always a new story. I think we 0:20:18.600 --> 0:20:23.080 tend not to repeat history in exactly the same form. 0:20:23.119 --> 0:20:24.800 And so if you look at all of the episodes 0:20:24.840 --> 0:20:28.879 that we did in the paper, they're all different in 0:20:28.920 --> 0:20:33.240 some way, but they're all similar in some ways as 0:20:33.880 --> 0:20:37.320 as well. So I think whether you look in the 0:20:37.400 --> 0:20:39.760 U S or abroad, this is something that's going to 0:20:39.840 --> 0:20:46.080 be with us. Uh. Your paper looks specifically at equities, 0:20:46.119 --> 0:20:48.480 and there are certain characteristics of an equity bubble that 0:20:48.600 --> 0:20:52.600 can't be replicated with other asset classes, such as new 0:20:52.680 --> 0:20:56.720 share issue in or a fetish for new types of 0:20:56.760 --> 0:20:59.640 companies versus the old types of companies. I know it's 0:20:59.680 --> 0:21:02.040 not that direction of your paper, but is there anything 0:21:02.160 --> 0:21:05.359 in your paper that um could perhaps be applied to 0:21:05.520 --> 0:21:09.359 non equity bubbles, such as, say, you know, bubble and 0:21:09.359 --> 0:21:12.800 a precious metal or some other commodity or currency or 0:21:12.800 --> 0:21:16.000 something like that. Yes, so we didn't look at other 0:21:16.040 --> 0:21:21.320 asset classes. I've done in my other work some research 0:21:21.480 --> 0:21:25.920 on the credit markets, and there there's some similar features 0:21:25.920 --> 0:21:31.160 in the data. So issuance actually is associated with poor returns. So, 0:21:31.359 --> 0:21:35.119 just to give you an example, when they're lots of 0:21:36.000 --> 0:21:40.280 low rated firms, so junk debt and so on relative 0:21:40.359 --> 0:21:45.720 to investment grade debt. That tends to forebode very poor 0:21:45.760 --> 0:21:49.440 returns in the credit markets more generally. So that's I 0:21:49.440 --> 0:21:51.400 think would be kind of consistent with what we find 0:21:51.400 --> 0:21:54.440 in the equity markets. We haven't looked at commodities. In fact, 0:21:54.600 --> 0:21:57.920 that was suggested to us recently. There's hundreds of years 0:21:57.960 --> 0:22:00.640 of commodities prices. You're only we might take a look 0:22:00.680 --> 0:22:04.280 at that. So Robin, I have to ask, Um, you've 0:22:04.280 --> 0:22:07.800 obviously been looking at many bubbles throughout history. What is 0:22:07.840 --> 0:22:12.520 your all time favorite bubble? Dot Com? I was in 0:22:12.600 --> 0:22:17.720 graduate school, and I was an M I T undergraduate, 0:22:17.840 --> 0:22:24.359 and I graduated in and many of my classmates went 0:22:24.480 --> 0:22:27.920 to pets dot com and all these kind of companies. 0:22:28.640 --> 0:22:32.520 And I was sitting in graduate school solving problem sets, 0:22:32.960 --> 0:22:35.240 and I couldn't believe that they were making all this 0:22:35.400 --> 0:22:38.800 money and doing all this excitement. And then it all 0:22:38.840 --> 0:22:43.040 came crashing down and I became a business school professor. 0:22:43.119 --> 0:22:44.680 So it was okay in the end, but it was 0:22:44.720 --> 0:22:49.399 a great experience just to watch and be part of it. 0:22:49.440 --> 0:22:53.359 Did you you felt that visceral feeling of missing out. 0:22:53.440 --> 0:22:56.919 And I guess you didn't ultimately jump drop out of 0:22:56.920 --> 0:23:00.760 school to become a join pets dot com pets dot com, 0:23:00.800 --> 0:23:02.800 but you must. You must have felt that sort of 0:23:02.840 --> 0:23:05.359 like that thing in your gut that a lot of 0:23:05.440 --> 0:23:11.160 managers who tried to avoid the uh the run up felt. Oh. Absolutely. 0:23:11.240 --> 0:23:15.959 One of the reasons I'm a behavioral finance economists is 0:23:16.000 --> 0:23:20.760 because I inherently feel all of these features of the 0:23:20.760 --> 0:23:24.520 financial markets, and so I find them fascinating and worthy 0:23:24.520 --> 0:23:29.160 of study. One other aspect of bubbles that people often 0:23:29.200 --> 0:23:32.600 talk about, and you look at these quantitative things, but 0:23:32.720 --> 0:23:35.639 certain cultural things. So I think, you know, there's the 0:23:35.640 --> 0:23:38.800 famous thing about sell if you hear the shoeshine boy 0:23:39.800 --> 0:23:44.160 uh giving stock tips, or I remember in my friend 0:23:44.160 --> 0:23:45.760 and I used to go to this pizza restaurant for 0:23:45.840 --> 0:23:48.760 lunch and then of it. During like late ninety nine, 0:23:48.880 --> 0:23:53.240 they started showing uh financial TV. They turned the channel 0:23:53.240 --> 0:23:57.119 from ESPN onto to watch the stock market, and that 0:23:57.200 --> 0:24:00.119 was probably in retrospect, quite a clear sign if you 0:24:00.200 --> 0:24:02.600 don't any work on that, because people always love to 0:24:02.640 --> 0:24:05.720 point out those signs and culture that sort of signify 0:24:05.880 --> 0:24:09.000 that something has moved beyond the financial realm and really 0:24:09.040 --> 0:24:11.640 become like sort of a cultural mania. Do you think 0:24:11.640 --> 0:24:15.600 there are any interesting avenues down that to explore? So, Joe, 0:24:15.680 --> 0:24:18.240 I think those things are pretty hard to measure. But 0:24:18.400 --> 0:24:20.960 there's a saying that if you hear about it at 0:24:21.000 --> 0:24:24.320 the Harvard Business School locker room, it's probably a bubble. 0:24:24.960 --> 0:24:28.120 I think measuring this pretty reliably going back is difficult. 0:24:28.200 --> 0:24:31.400 We're trying to do that, so look at more interesting, 0:24:32.520 --> 0:24:36.600