Streams

Spotting Financial Bubbles Before They Burst

Monday, April 04, 2011

Vikram Mansharamani, lecturer at Yale University and a global equity investor, explains how to identify unsustainable booms and forthcoming busts. Boombustology: Spotting Financial Bubbles Before They Burst gives an in-depth look at several major booms and busts and shows how to identify upcoming financial bubbles and the tell-tale signs of a forthcoming bust.

Guests:

Vikram Mansharamani
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Comments [12]

mskccheats from New York

!Let’s extrapolate (on mskccheats' comment above)! … for rhetorical purposes: who might benefit from a tip from a scientific founder of Ariad’s ... real and/or imagined ‘tippees’ … the head (VP) of Sloan’s Public Affairs Department (PA often processes nomination packets for awards [Boy Scout -> Nobel!] Avice Meehan is the erstwhile VP of PA of MSKCC!) … the Executive Vice President of MSKCC (the head business person at Sloan … John Gunn is the EVP of MSKCC) … Intellectual Property related persons at Sloan (Jennifer [nee] Brooks is the erstwhile admin for Bioorganic’s docket at Sloan and Andrew Maslow is the in house IP counsel) … Scientific Colleagues (Neal Rosen, Howard Scher are ‘Members’ at MSKCC) … only hypothetical … what if a sibling of a Scientific Founder / Insider ran an in house boutique formerly at Merrill [currently at UBS!] (The Danishefsky Group!) and a member of that group had a mysterious demise (the niece of the Insider, the daughter of the head of the financial boutique subdivision) … what if a stalwart [someone who would have the backbone to stand up to curious anomalies at Sloan] and loved physician surgeon curiously happened to be run over by an ambulance [Jeanne Petrek 1948 – 2005] … another curious demise … Sloan’s erstwhile Physician In Chief (took the two whole method to shuffle off this mortal coil … [self inflicted gun shot wound to the head] … word on the street is that he was suffering from a virulent cancer AND that the Feds were closing in … then there is !Ed Sauseville! … who administered the Bioorganic’s RAID (rapid application to industrial development) grant while at the NIH to facilitate its epothilone development [curiously, Sarah Danishefsky in but one instance of challenged ethics instructed a colleague to embargo known information relative to the availability of epothilone clinical trial candidates [from desperate cancer patients and/or their proxies ... in variance with Sloan's motto, 'the best cancer care anywhere'] developed at BMS that competed with those developed in house at Sloan!] and then curiously joined the SAB (scientific advisory board) of the very biotech that purchased Sloan’s portfolio of epothilones (Kosan, a company subsequently purchased by BMS). … Neal Rosen, too, sat on Kosan’s SAB … sver arbitiers and possibly COIs (conflicts of interest) … hard work and creative genius deserves its rewards, but there need to be checks and balances to ensure that craven self servitude does not carry the day at the expense of patient safety. Got that Sloan?

Apr. 21 2011 05:25 PM
David

One other comment I would like to make concerning the guest's erroneous belief that gold is in a bubble. Leonard mentioned that Glenn Beck and Ron Paul say that people should buy gold. When EVERY talking head on CNN, MSNBC, and the Fox News Network are telling you to buy gold—at the same time that Glenn Beck and Ron Paul are telling you that there is a bubble in gold and to sell—THAT'S when you'll know there is a bubble in gold.

Think back to 2006 when a few people (like Ron Paul—who was actually saying it even a few years earlier) were warning about the housing bubble that was about to burst while all of the talking heads (including Fed chairman Ben Bernanke) were saying that the economy was fine and that there was no housing bubble.

The same Ben Bernanke, the Princeton economics "expert" who didn't see the housing/economic bust coming, is now "leading" us back into "prosperity" by continuing to do the EXACT SAME THING that got us into the housing boom/bust in the first place—inflating the money supply by pumping more paper money into the economy with ridiculously low interest rates.

I'm sure many of you now see from your food shopping purchases that prices are already higher, i.e., inflation is starting to rear its ugly head. The only financial insurance against this is gold (and/or silver, if you like).

Apr. 04 2011 03:24 PM
David

Here's why there are booms and busts in the United States (and everywhere else, for that matter). Leonard's guest is presenting a quasi-theory, i.r., he omits the most important cause.

This explains the theory of boom/bust cycles:

http://mises.org/tradcycl.asp

Here's the actual cause of the United States' boom/bust cycles for the last 100 years:

http://mises.org/books/fed.pdf

Here's why we had the most recent boom/bust cycle (especially for those who erroneously believe we didn't have enough regulation of the financial sector):

http://www.amazon.com/Meltdown-Free-Market-Collapsed-Government-Bailouts/dp/1596985879

BONUS: Here's what caused the Great Depression:

http://mises.org/rothbard/agd.pdf

If you want to believe anything else, be my guest—you'll be making David Rockefeller and all his bankster friends very happy.

P.S. If this guest thinks that gold is now in a bubble, he's even more economically-ignorant than I first thought. Though gold (or silver, for that matter) will definitely be in a bubble perhaps five or ten years down the road, it is nowhere near that yet. Also, he thinks that the worthless paper currency we use is no different from gold—i.e., a commodity that has a use outside of being used as a medium of exchange? This guy is economically clueless. Don't say you haven't been warned.

Apr. 04 2011 01:49 PM
Peter Talbot from Harrison NJ

Economic activity happens (per Adam Smith, et al) when inequalities in cost and/or inequalities in price conspire to open up new specific exchanges. They are always destructive of a previous paradigm (for which read "bubble"). If the previous paradigm is such that a lot of human or investment capital is invested in the exchange (e.g.: wooden wagon wheels, gas lighting, etc.), the new activity will be seen primarily in the negative as a destroyer of lives and livelihoods and the attention of the population and regulators will be in attempting to mitigate the effects of the change on those least able to "re-tool" for the changed opportunity and to punish any speculators that benefit from the new opportunity. Regulators are always limited to these roles (however misdirected) because (a) they are never knowledgable about future market trends, all of which seem unpredictable to those who don't "speculate", and (b) because government, despite all our popular blather on the subject, cannot and never will be able to provide a "level playing field" whereby workers employed in or by one exchange are equipped to move seamlessly to a new technology or market. The very fact of government stands against and in apposition to economics. A "level playing field" is only possible in a simple barter economy, and then only when both traders are equally armed with clubs or spears to ensure honest weights and dealing.

So, to say it simply: all economic exchanges are based on unequal valuation of opportunity. All exchanges are "bubbles" that burst when demand subsides or supply runs out. Spotting the next one is easy. Here's how:

(a) bubbles don't come one at a time. There are any number of "bubbles" happening all the time. Any hot exchange that seemingly cannot contract can be predicted to burst sooner than "cold" exchanges precisely because these attract competitive product or service.

Want a current unspoken big bubble? It's the US retail credit economy. That's a bubble, and the only reason it hasn't burst with violence (real and figurative) is that the US government is propping up consumer's "disposable" income to ensure that big box stores and agribusiness lobbies are not shuttered. What will be affected when the inevitable "bust" happens? 1. Hyperinflation is likely, with massive currency devaluations. Problem is: the Fed won't be able to discount vs. commodites . For this oil and foodstuffs in the US will hyperinflate. The US obesity problem will be cured overnight. 2. Because the US has swallowed the "free trade" propaganda of retailers dependent on depressed foreign wages, the US is in no position to ramp up production of most competitive manufactures to compete with China.

We are the bubbles, Leonard. All you need to see them is to look in the mirror.

Apr. 04 2011 01:39 PM
Henry from Katonah

Regulations are usually designed to keep the disaster that just happened (e.g. the Securities and Banks new deal legislation of 1933-35. The financial sector hates it , but then adjusts and a period of stability ensues.
Later, sometimes generation later (e.g. 1981 to present) , conditions change enough that the stability causing regs are eased or ignored. Players who should be regulated get around the regs and cause disaster.
Your guest is saying that the regulators caused this? -- Oh, right they caused it by NOT doing their jobs (e.g. in the GWB yrs)!

Apr. 04 2011 12:48 PM

Mr. Lopate:

I thought that your guest linked the acceleration in severity and frequency of recent "bubbles" to the government's efforts to cope with, ameliorate, the preceding episode of financial excess?

How can strengthening the government's role in these matters avoid future bubbles?

Are you saying that:
"This time it will be different."?

Apr. 04 2011 12:43 PM
NJ

We need to align the price of assets closer to their value. The current system allows the speculative part to dominate and expand into a bubble. Sensible asset sale and purchase restrictions would break this vicious cycle- see this proposal to make stock market trading saner

http://www.businessweek.com/investor/content/mar2011/pi20110311_078169.htm

Apr. 04 2011 12:27 PM
jgarbuz from Queens

I think there is a massive speculative boom growing in college degrees, where more and more kids and families are told they have to get deep into debt because a college degree "guarantees" a higher income over a lifetime. Well, that may have been true for the last century, but can we be certain to be the case forever? Maybe studying to be a welder or plumber might be better. Or even a farmer.

Apr. 04 2011 12:27 PM
mskccheats from NY

[yikes! accidentally posted on a related story, but belongs here with the 'bubble' story ... mea culpa ...] A hypothetical: Ariad (Aria) stock baselined at ~ .50 (50 cents!) ca. 1999 when other biotechs joined the fray of halcyon hype due to an intellectual property he said she said broohaha. When the matter was settled the stock rocketed to ~ 48$ (almost a 100X or 10,000% increase) in perhaps 4 months (from ~ October 99 through March 00) [when Clinton and Blair had a joint press conference stating that genomic information will be shared sending a wrench into possible patenting of genes and perhaps precipitating the biotech and thence tech stock bubble burst]. Insiders at Ariad (e.g. founding scientists, etc.) may have been privy to WHEN the settlement was to occur and may have been generous with this information. John Deutch (erstwhile DCI, Director Central Intelligence) admonished for faux pas-ing (laptops [v. dancers] at Starbucks??) and subsequently pardoned seconds to midnight by Clinton when Hillary was proverbially stealing the White House silverware ... has been involved with Ariad [Director??] as he's a member of the proverbial Cambridge Biotech Curia. Wouldn't it be funny if Chelsea (only a hypothetical!) just happened to have purchased Ariad stock during an interestingly convenient time frame? Don Wiley one of the (!conspiracy theorists beware!) post 9/11 missing/dead microbiologists just happened to leave his running car on a bridge over the Mississippi whilst attending a BSA (board of scientific advisors) type meeting and fell into the river ... to be found perhaps ~10 days later. Don was pals with Ariad insiders. if you (one, you, me, i, whomever) picked up 5K of Ariad stock at a convenient time and sold it the day before the Clinton Blair press conference you could have made a cool ~$500K!! When esteemed institutions such as mskcc have CFOs who state: “Sloan is pursuing a systemic approach to reducing expenses and increasing revenues […] One example of this is discouraging terminally ill patients from seeking initial treatment or second opinions from the cancer center […] the admission of such patients is counterproductive […] to Sloan Kettering.” [paraphrasing salient features, MSKCC, CFO/Chief Financial Officer] ... one must remember that the very people or institutions we trust implicitly are not always what they seem and that the forces of commerce (and, too, greed and self servitude) do indeed influence actions. insider stock carpe diems are not immune to this premise.

Apr. 04 2011 12:25 PM
Barry from LES

Can you ask him about "credit repair" businesses. I see a lot of lawyers out there offering very inexpensive services that clean up credit by finding loopholes in credit law and making credit companies back down. This seems like a big bubble as someone has to pay these debts at some point right?

Apr. 04 2011 12:21 PM
antonio from park slope

Please explain (lol) the "capitalization" portion of the bust he just mentioned...

Apr. 04 2011 12:15 PM
jgarbuz from Queens

Wherever "the herd" senses the possibility of a higher return on investment than would otherwise be warranted based on the natural growth of the economy, that is the direction in which the herd will drift, until it builds up into a mindless stampede. Once it has reached the level of a stampede, there is no reasoning with it. YOu cannot reason with a stampede.

Apr. 04 2011 12:06 PM

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