November 19, 2013

The ten laws of bubbles

Doug Kass gives his take on the top 10 conditions on Financial Bubbles

1. Debt is cheap.

2. Debt is plentiful.

3. There is the egregious use of debt.

4. A new marginal (and sizeable) buyer of an asset class appears.

5. After a sustained advance in an asset class's price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.

6. The distance of valuations from earnings is directly proportional to the degree of bubbliness.

7. The newer the valuation methodology in vogue the greater the degree of bubbliness.

8. Bad valuation methodologies drive out good valuation methodologies.

9. When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.

10. Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed "financial weapons of mass destruction").