There is No Time Limit in the Definition of a Speculative Mania

“I do believe there is a statute of limitations on a “bubble”. I think when prices continue to rise over a 12 year period and still show no signs of letting up, then it would be called a sustained trend.”
reality check at VREAA 5 Apr 2012 9:57pm

Nasdaq composite 1986-2012 (click on the chart for large version)
After more than 14 years of run-up, the Nasdaq ‘corrected’ by over 75%, and 12 years later is still 40% below its 2000 peak.
In 1999 the vast majority of market participants were arguing that tech stocks were in a ‘sustained trend’.

43 responses to “There is No Time Limit in the Definition of a Speculative Mania

  1. Basement Suite

    “I do believe there is a statute of limitations on a “bubble”. I think when prices continue to rise over a 12 year period and still show no signs of letting up, then it would be called a sustained trend.”

    You know that does have a ring of truth to it.

    • Basement Suite

      I will add, 12-year trends can change when the 12-years of free money changes. Cue: raise mortgage rates.

  2. for 9 of these past 12 years mortgage rate avg was over 6%. In fact, the years (2006-07) that saw some of the highest property price gains saw mortgage rates over 7%. Something to consider for those hanging their future on higher mortgage rates deflating prices

  3. It is not necessary for interest rates to increase for the Vancouver speculative mania to end.
    For instance, consider this dynamic: ‘Despite low rates, many Canadians holding off home purchases’ (from yesterday)

  4. Sticking with vreaa’s Nasdaq analogy… what caused the tech bubble to pop? Well, people woke up and realized that the fundamentals just weren’t there. And then: a sudden, devastating shift in sentiment. Greed turned fear. That’s all.

    When people realize that Vancouver prices are similarly detached from fundamentals, the same thing will happen here.

    • Agreed.
      Ready money was a vital part of the bubble getting started, and getting so large, but a change in people’s beliefs about it can cause a complete implosion, even if the cheap money persists (and it likely will).

    • Phase Transitions… The ‘hard’ science perspective…

      http://tinyurl.com/7paarzp

    • I still remember my co-workers from 2001, heavily invested in NASDAQ stocks and holding on to those stocks because “such large declines in stock prices are not normal” and “we will certainly return to the trend” etc.
      They lost everything.

    • reality check

      C’mon you don’t see any difference between a hard asset like real estate and an empty set of internet stocks. So sad

  5. The market can stay irrational longer than you can stay solvent.

    (I imagine the quote makes more sense about a bear-market risk to an undervalued company and its investors, but where ever you’re standing, it’s true that economic manias can last for an unreasonably long time.)

  6. Using this analog, Vancouver RE’s 2008 moment was in 1998 with the Naz bottoming around $1500. 14 years later it’s doubled.

    • No, using this analogy, it shows that small corrections of 10%, 15%, even 20%, along the way, do not deflate a bubble, and are expected ‘noise’ during the uptrend… The bubble isn’t over until very large implosion completely wipes out all speculative sentiment.

  7. Oh snap!

    Flowchart

  8. Using this 25 yr analog, if you bought anytime between 1986 and 1999, or 2001 and 2011 you are doing fine.

    I’ve been commenting on this blog for three yrs (?!) with the caveat that I’m not a raging bull. But I’ve also been saying it’s difficult to time the market. It looks real easy in hindsight, (“I’ll just sell in 2000 and buy back in 2004”) but much more difficult to do in real time.

  9. For the technically inclined, an up-count of around 13 (years in this example) is an important warning that a correction is due paticularly if prices are moving parabolic. This general rule is universal across markets and history and is supported when other technical indicators and fundamentals indicate overbought conditions. See any good TA books by Murphy and Nison.

    • reality check

      I am not arguing that there won’t be a correction but I am saying there won’t be a cataclysmic drop of 50%

      • 4SlicesofCheese

        What is your prediction?

      • Without some change in the underlying fundamentals, the technical target correction level is generally the 50% retracement split into three corrective waves. I think Vancouver real estate prices will follow this general case because the market character is very typical of a bubble. A classic pattern to say the least.

      • Sounds about right to me too Airdales. This is going to be the big one. Not just because Vancouver itself is in a one-of-a-kind bubble that is almost unique the world over……but because the deflationary headwinds across North America and much of the globe now appear to be stifling any prospects of renewed growth. It is dismal to depressing. I would be happy to see the chart you refer to by the way just out of curiosity. There is the ongoing concern too that in a last urgent (desperate) attempt to boost economic activity, that some really serious inflationary forces might be unleashed as a cure to all our woes. God help us then as we spiral into an even greater debt vortex of unimaginable consequence followed by an even longer and more depressing period of deflation the likes of which has not been seen since the South Sea Bubble collapse. At least it will be “interesting”. The upside is that everyone who goes bankrupt won’t be in debt anymore. Hooray for them.

  10. It’s good to see that the Vancouver Sun is helping people make responsible investing decisions:

    “She added buyers can borrow the down payment through a line of credit, personal loan or possibly cash advances against a credit card”

    http://www.vancouversun.com/business/First+time+buyers+have+options+that+important+down+payment/6419013/story.html

    • nobody you know

      Hint: If you can’t afford the down payment YOU CAN’T AFFORD THE MORTGAGE.

      That’s funny, but not really. I remember a comment I made last year that one of my relatives had done the credit card thing and was basically called a liar by some know-it-all bull who simply could not fathom that this was happening in Canada.

  11. I was at a meeting related to health care and social services. There were a couple on interesting discussions:
    1) Vancouver has much longer wait lists for many surgeries (eg. hip replacement) than smaller centres in BC. These were reliable sources who all agreed on it. What’s the point of growing old in Vancouver, if you can sell your house, buy in a smaller centre, pocket a million AND get better health care (probably from doctors who chose to move there for the low housing costs)?
    2) While rents were seen as too high for many seniors, there was general agreement about rising vacancy rates. The West End was mentioned especially for buildings which never had empty apartments are now looking for tenants. For now, the landlords are trying to get the sky-high rents but how long can that last? There was regret about how the West End has become less accessible for Seniors, but also optimism that this trend can be reversed.

  12. During the dotcom bubble, I recall lots of banks giving out investment loans at fairly low interest rates. The rationale was that the payout on the markets was going to be greater than feeding the loan.

    And it was… until it wasn’t.

    There’s a definite parallel in Canadian real estate speculation.

    • Yes, and mortgage or margin rates, and borrowing terms, are always the opposite of what they should be:
      Money is easy to borrow when the market is overheated (when one should be selling) and hard to borrow when the market is oversold (when one should be buying).

      • So true, ed. Hardly seems fair. The upside is that private lending flourishes after the down turn. Everyone needs to get ready for that phenomenon to materialize. The very best point is when capitulation has arrived and those who are mortgage free finally sell on vendor carry terms to anyone able to make the payments. With all the retirements on the horizon this is going to be a goldmine of opportunity to get good terms and easy credit despite the banks being tight as a drum.

  13. hmmm … the more things stay the same, the less likely they’re going to change. say, cover up the fuel gauge on your car and see how well this idea works.

  14. Adjust that NASDAQ chart for inflation and you can see over exuberance in 1995 as the internet caught on, and the beginnings of total stupidity in 1998 when Greenspan and Rubin “saved the world”, er, I mean the bubble.

  15. Dr mortgage or: how i learned to stop worrying and love the bubble.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s