|Launch Bubble Experiment Video|
Since the eighties, Mr. Smith has been conducting experiments that reliably created nice and frothy financial bubbles no matter who was behind the buy button. It seems that when you ask people to make money, everybody has it within themselves to be able to turn into an unmentionable, like a Wall Street banker or worse. I suggest that you check the short video describing one of these tests. Seeing Mr. Smith's experiments has changed my views about bubbles. I am convinced that we will continue to create them.
Right now, a bubble in bonds is ready to pop any day. But since almost no one understands bonds, it will probably be misrepresented. Bonds are the kind of economics stuff that makes people's eyes glace.
What will surely get lots of airtime are the effects from the blow up. Whether we know it or not, bonds affect everything. Interest rates and borrowing are tied to the bond markets. Bonds also affect cash-flowing assets like real estate and dividend paying stocks.
Real estate does not have to be in a bubble for home prices to come down sharply. As long as bond values collapse, real estate will correct to the point of long term balance. Even Robert Shiller, the greatest authority in real estate and the creator of the S&P Case-Shiller Index, has been warning that a real estate bottom has not been reached yet. He is clearly skeptical of the sustainability of the present rise in the housing index that he created.
Just 13 years ago, we saw the collapse of the Tech Bubble. Then, in 2008, we all played the game once again. We witnessed the implosion of the financial derivatives and real estate bubbles. To prevent these bubbles from happening, many have called for more government oversight and more regulations. Yet existing regulations proved inadequate. Meanwhile, bigger regulators and the structural rigidity from extensive regulations do create a lethargic-bureaucracy where progress is slow and innovation is absent.
|Theory of Constraints|
In conclusion, the evidence suggests that, like Murphy's Law, bubbles will happen. Perhaps it is time for the bond bubble to pop next. But Rather than placing blame, we should admit that bubbles are within us all. There is good scientific proof supporting this belief. We should also understanding that regulations will fail to prevent bubbles because of difficulties anticipating where to place such regulations. On the other hand, and since bubbles are created by incentives, we should look at incentives as a way to prevent bubbles. Maybe there is a lesson within operational practices at places like Toyota after all.