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Do you think Wall Street is in another bubble?

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Do you think stocks are inflating in a bubble that's about to burst?

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Depends. Remember the dollar is also inflating.

In gold terms, definitely.

The appreciation in stock prices is in my view a bubble, but given the expansion of the money supply, the stock market may just keep going up (in nominal terms, not in real terms) until the fiat money system collapses. It could end in a very ugly way.

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Sucks for me, I'm in my early 20s...

Pile up the debt - fixed rate, non-inflation adjustable. In short, mortgage or student, mostly.

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Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

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Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

I believe inherent inefficiencies in the capital allocation process coupled with human nature mean there always be bubbles (e.g. was the Tulip Mania government-driven?). However, in a free market, they would die out much faster.

I heard today on French radio a - technically - right-wing politician arguing for doubling the number of people who should have access to zero-interest mortgages (taxpayer-backed). She said it was an outrage that 30% of the population couldn't afford a home. History is condemned to repeat itself.

But wait, of course not, it's the traders' fault, they created the crisis :D

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History is condemned to repeat itself.

If we don't learn the obvious lessons, we're "condemned" to repeat historic atrocities. But the repeat isn't the lock so many around us insist that it is.

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History is condemned to repeat itself.

If we don't learn the obvious lessons, we're "condemned" to repeat historic atrocities. But the repeat isn't the lock so many around us insist that it is.

Asia has learnt. Stratfor recently wrote a great piece on the game the Chinese leadership is playing. They seem to understand capitalism much better than we do.

The thing is - by a natural process of evolution, humanity eventually learns, if there are incentives to do so. You can see this by seeing how far ahead the US is from Europe in terms of quality of life and purchasing power (to the amateurs of French cuisine, British clothing, German cars and so on, this will seem like heresy).

And the same is true of companies, especially investment funds.

The thing is, there are two options. Either politicians are REALLY stupid. Like the Wesley Mouches of Atlas, they whine and don't understand why their mediocre "solutions" do not work. Or they know exactly what they are doing, in which case they are criminals. I believe we have a mix of both. Some are criminals, like the Spanish petitioning for money and attacking realistic investors, some are just misguided from sheer stupidity like the French (Sarkozy in particular) and some are honest and prudent, like Angela Merkel refusing Greece free money.

As for the US, I most probably do not need to comment :D

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History is condemned to repeat itself.

If we don't learn the obvious lessons, we're "condemned" to repeat historic atrocities. But the repeat isn't the lock so many around us insist that it is.

I agree with this. Had friends of mine not bothered to explain things to me (via the Socratic method, asking annoying questions) I would probably still be a socialist thanks to my French upbringing.

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Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

I believe inherent inefficiencies in the capital allocation process coupled with human nature mean there always be bubbles (e.g. was the Tulip Mania government-driven?). However, in a free market, they would die out much faster.

I heard today on French radio a - technically - right-wing politician arguing for doubling the number of people who should have access to zero-interest mortgages (taxpayer-backed). She said it was an outrage that 30% of the population couldn't afford a home. History is condemned to repeat itself.

Wow. That makes me clench. Not everybody should own a home, obvously. On the bright side, your comment gives me thought. Maybe I could time the real estate market next time... :D (sarcasm)

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Wow. That makes me clench. Not everybody should own a home, obvously. On the bright side, your comment gives me thought. Maybe I could time the real estate market next time... :D (sarcasm)

Not such a bad idea. I believe there could be a real edge in understanding the mechanics of populist socialism (basically, Atlas), studying the timing and mechanisms by which they have happened in the past, and then studying the best ways to take advantage of them.

As far as I'm aware, no hedge fund is currently running this as an explicit strategy (possibly because of political repercussions when they do - remember Soros' short of the pound, or recent attacks on people like Hugh Hendry for shorting Greece/the EUR) although many global macro or other fundamentals-based funds do incorporate basic classical economics in their views :D

It is definitely something I will look into later in my life, when I have both the capital and the experience to do this.

By the way, it's not so much timing the real estate market as those of its players that are most exposed to fluctuations. For example, whilst Goldman's CDOs were of exceptional quality, Merrill, which was a late entrant and wanted to gain market share, produced some true abominations. A savvy person could have spotted that (a 22 year old Harvard undergrad did, read her paper here: http://www.hks.harvard.edu/m-rcbg/students...CDOmeltdown.pdf ) and done a simple long/short trade (you need both sides to fund it). Similarly, if you believe there will be swings in gold, you can easily maximise your returns by trading silver instead, which fluctuates in a more amplified manner but according to similar fundamentals, without taking on risky leverage.

(please do not enter ANY of the above markets without a SOUND understanding of how they work. Usual disclaimer. :D)

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Not to sound to simplistic, but as long as the government plays a part in this industry (along with others) there will always be a bubble(s) awaiting us in the future.

I believe inherent inefficiencies in the capital allocation process coupled with human nature mean there always be bubbles (e.g. was the Tulip Mania government-driven?). However, in a free market, they would die out much faster.

I would not call what you state as "bubbles", but instead flucuations which is perfectly fine and normal. In a free society there would be no long-term irrational increases or irrational decreses within business as there would be no one to force these things to happen. If the cost of homes goes up because of a lack of supply then capitalist builders would step into that market to make money while filling the demand and the overall house cost would soon return to a lower cost. In other words, government manipulation of any field always creates "bubbles," but in a free market all we would see is a change of cost and the supply or demand changes. The more statist a country becomes the more often we will see "bubbles" and the more capitalistic it becomes the less we will see of irrational actions that cause "bubbles." And if a country or economy were totally free we would not see any "bubbles."

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I would not call what you state as "bubbles", but instead flucuations which is perfectly fine and normal. In a free society there would be no long-term irrational increases or irrational decreses within business as there would be no one to force these things to happen. If the cost of homes goes up because of a lack of supply then capitalist builders would step into that market to make money while filling the demand and the overall house cost would soon return to a lower cost. In other words, government manipulation of any field always creates "bubbles," but in a free market all we would see is a change of cost and the supply or demand changes. The more statist a country becomes the more often we will see "bubbles" and the more capitalistic it becomes the less we will see of irrational actions that cause "bubbles." And if a country or economy were totally free we would not see any "bubbles."

This is what I used to believe. But Jesse Livermore (the greatest trader in the 20th century), in particular, made me change my mind. He observed that the industrial man who had spent a lifetime carefully considering risk and return, being careful with every cent invested in his business, making his fortune out of his great sense of reason and rational decision making, would then approach the stock market much like a casino, buying what was hot, generally getting fleeced by professionals within hours. And coming back for more, expecting a free lunch with every trade, despite knowing from life experience that wealth always came from effort, not handouts. It certainly baffled him, since he built his stock market fortune on sticking to his rules and improving his system painstakingly. I definitely agree with James Montier etc. that there are herd spirits inside humans, and that they will never go away (and never have in the past).

One example of an unregulated bubble is the commodities (mainly oil but also non-precious metals) of 2008. Commodities are completely unregulated. "Insider" trading is not just legal, it is encouraged - for example, every oil producer has its own proprietary trading desk, whose role varies from providing a basic interaction between Exxon and the market, to taking on large prop risk much like the prop desks of investment banks. Those traders are directly linked to every well in every site ran by the companies - if a site goes off, they know first. However, banks fought back by buying and operating oil tankers at a loss/small profit, which enables them to have access to similar "insider" information before the market. Commodities investing is therefore extremely dangerous for the retail investor - exactly what edge are you hoping for?! - except in the case of very smart trading systems disconnected from the fundamentals of the commodity (see e.g. The Complete Turtle Trader by Michael Covel). It also means bubbles, when they happen, happen fast, brutally, and are over just as quickly. Observe the price of oil over 2007-2008-2009:

http://upload.wikimedia.org/wikipedia/comm...pot_monthly.svg

Part of this was black box, trend following (they should be called trend enhancing) hedge funds. That bubble was up and over so quick it didn't hurt retail. However, it did have some negative consequences related to statism: it provided the justification for much of the cleantech/green investing that happened in the 5 years preceeding it, and then maximised the credibility of the idiots going on and on about how peak oil had happened and meant the end of the world. The one you will most have heard of is a certain annoying little man who tried to run for President a while back, failed, and decided to gain power the Toohey way instead. You must have heard of, if not seen his "film". I really hate this trend because nowadays very few are the investors that are not involved in some kind of alternative energy thing. Most of them are market timing a bubble cynically, but it gives the green credibility they really should not have.

That being said, I have not seen or studied enough data to draw conclusions about bubbles yet. It doesn't help that much of the economics profession is at the pay of the governments. And Keynesian when necessary.

(by the way, if you believe in peak oil, or that oil supply is necessarily restricted looking long term, plot the above price of oil in terms of gold oz, rather than USD. Amazing what story this tells. Any inflation-proof asset will do.)

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Here's a quote that I just read (Warren Buffett, Buffett Partnership Letter, 1959) showing some more of that trend:

"I think this summarizes the change in psychology dominating the stock market in 1958 at both the amateur and professional levels. During the past year, almost any reason has been seized upon to justify "investing" in the market. There are undoubtedly more mercurially-tempered people in teh stock market now than for a good many years and the duration of their stay will be limited to how long they think profits can be made quickly and effortlessly. While it is impossible to determine how long they will continue to add numbers to their ranks and thereby stimulate rising prices I believe it is valid to say that the longer their visit, the greater the reaction from it."

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That's interesting rtg24. I appreciate your input (including that of Livermore and Montier).

Last year, I goofed around with day trading. I found it to be educational, and realized that it should not be a casual hobby unless one enjoys being fleeced. I tested some theories and enjoyed it. If I paid attention I would have a good day. If I didn't, I wouldn't. I could just picture scores of profit takers, sitting anxiously staring at their computer screens all day long. "Made a dime! Sell!!!!"

I still like gold, as a long-term investment and portion of my portfolio. I like the physical gold, too. Other than watching my tgldx every day, I don't like a piece of paper that tells me I own gold :D

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Also in the specific case of the US and UK, please bear in mind the structure of the investment world. Who owns equities and bonds? Pension fund managers. Large asset managers. Insurance firms. Mutual funds.

These guys are rated against the curve. If they fall below a certain point, they're fired/divested from. It's all about being average (hence the fallacy of relative returns - "Sir, you appear to have lost 40% of your net worth in 4 months, but it's ok, the market on average lost 45%. I've taken the liberty of paying my 0.5% management fee cash, but we decided to be generous and waive 50% of the profit fee, so we'll only take 5% on the 5% of outperformance."). The only way to ensure you perform like the rest is to buy what the rest owns, to act like the rest. So in a way the industry is structured to behave like a herd of sheep.

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Rtg24,

Your example still only explains flucuations within a market which sometimes happens when people bid up the price for the stocks/commodities of which they expect to make a profit from. In other words the spikes you mention are a normal part of a capitalistic society as the bidder/investor is looking to purchase ownership and hence part of future profits. When someone purchases a stock they are purchasing part ownership of a company or commodity of which they expect to make profits on. Now if the stock purchaser is of such little intellect that he fails to look at the cost and the possible return of investment and instead spends foolishly then he gets what he deserves. But the more that government intervenes for the idiotic invester, or what ever reason they give, the worse and more often the bubbles will become. Capitalism demands the best from everyone, to include the stock market investor. And in a rational society the professional that looks to "fleece" his clients should and would also get what he deserves, going out of business or jail time for being a fraud. The more the government regulates an industry the more they will run off the good people within that industry and hence irrational or immoral people will be left behind to create the mess we see today.

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Rtg24,

Your example still only explains flucuations within a market which sometimes happens when people bid up the price for the stocks/commodities of which they expect to make a profit from. In other words the spikes you mention are a normal part of a capitalistic society as the bidder/investor is looking to purchase ownership and hence part of future profits. When someone purchases a stock they are purchasing part ownership of a company or commodity of which they expect to make profits on. Now if the stock purchaser is of such little intellect that he fails to look at the cost and the possible return of investment and instead spends foolishly then he gets what he deserves. But the more that government intervenes for the idiotic invester, or what ever reason they give, the worse and more often the bubbles will become. Capitalism demands the best from everyone, to include the stock market investor. And in a rational society the professional that looks to "fleece" his clients should and would also get what he deserves, going out of business or jail time for being a fraud. The more the government regulates an industry the more they will run off the good people within that industry and hence irrational or immoral people will be left behind to create the mess we see today.

Ray,

I define bubbles as being when an asset class or particular assets are hopelessly overvalued, with a large proportion of market assets flowing straight in for no reason other than emotions. It's usually accompanied by sayings such as "this time is different" or "the new paradigm" or "the new economy", coupled with long explanations of why, really, stocks with no earnings forecast for 3 years are worth hundreds of millions, or why something which traded at $20 a barrel just a few years ago is suddenly worth $148 a barrel (or even the $70-80 range currently used). A year-long or longer overvaluation by several multiples of a long term average or trend is no fluctuation in my book... especially when the above qualitative indicators keep ringing!

As for fleecing. I was not referring to professional investors taking the industrialist's money and wasting it in bad investments. I was referring specifically to the forces of competition. As an analogy, imagine if somebody, noticing that you as CEO and founder of Progressive Exercise, were driving around in a rather nice Mercedes, decided to start their own exercise programme, but without any prior knowledge. The man reads a couple of books, perhaps one written by Schwarzenegger, buys some equipment, and advertises himself as a direct competitor to you, going for the same clients with bespoke requirements that form your clientele. Three months later, he is out of business, because what you are selling is a lifetime of expertise and the understanding and knowledge from thousands of sources, whereas he is asking a high price for something anybody could read in the same book he did (that being said, my understanding of the gym industry implies to me that many people simply do not care enough to see the difference :D ). As you rightly say, investing is not just a field where professionalism is required, it is also one of the most competitive, most difficult fields in which to be successful in the long term because it is so highly competitive. I am not going to be able to pick up a violin and play it tomorrow, even if I already play two classical instruments to near-professional level. Similarly, whilst the industrialist understands business well, he is not able to invest successfully in many cases without going through extensive efforts to understand the process and establish his edge, just as he did with his business. A value for a value...

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Rtg24,

With your example of my business and it's fictional competitor you hit the nail on the head but unfortunately it seems you missed the reason why your industry has gone to hell (along with many others) as it is not competition. The government deems integrity and trust, which must be earned, as irrelevant by creating regulations. In other words my reputation must be earned and when the government steps in and regulates an industry with fake guarantees of safety they discard the values of integrity and trustworthiness and promote the opposite of their supposed intentions. The reason being is that when the government enters a market it discards all the hard earned reputations of companies, which comes from years of demonstrating their integrity and trustworthiness, when it puts all companies or individuals on the same level by making unacheiveable claims of safety to consumers by forcefully setting minimum standards. Now that the client has been given a false guarantee by the government they no longer use their rational faculty to judge whether or not a company has a good reputation by being intergral and trustworthy and instead makes those virtues irrelevant. And what we end up with is markets full of liars and cheats who instead of being driven by self-interest and a desire to achieve a long term profit by be being integral and trustworthy are now looking only short-term and driven by fear.

So who do you now think the primary creator of "bubbles" in the market place are, irrational investors or the government regulators that create them?

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With your example of my business and it's fictional competitor you hit the nail on the head but unfortunately it seems you missed the reason why your industry has gone to hell (along with many others) as it is not competition. The government deems integrity and trust, which must be earned, as irrelevant by creating regulations. In other words my reputation must be earned and when the government steps in and regulates an industry with fake guarantees of safety they discard the values of integrity and trustworthiness and promote the opposite of their supposed intentions. The reason being is that when the government enters a market it discards all the hard earned reputations of companies, which comes from years of demonstrating their integrity and trustworthiness, when it puts all companies or individuals on the same level by making unacheiveable claims of safety to consumers by forcefully setting minimum standards. Now that the client has been given a false guarantee by the government they no longer use their rational faculty to judge whether or not a company has a good reputation by being intergral and trustworthy and instead makes those virtues irrelevant. And what we end up with is markets full of liars and cheats who instead of being driven by self-interest and a desire to achieve a long term profit by be being integral and trustworthy are now looking only short-term and driven by fear.

So who do you now think the primary creator of "bubbles" in the market place are, irrational investors or the government regulators that create them?

Ray,

I absolutely agree with your first point there. Like most of my peers (at least the honest ones), I intend to only spend as much time on the government-backed sell-side/large institutions oligopoly as is required to build a track record, hoping to escape to the wonderful and meritocratic world of unregulated funds (from venture capital and private equity to high frequency trading proprietary shops). In those institutions, you eat what you kill. If you look at the % of Madoffs, it is actually very low (and Madoff investors had it coming - he was detected in the book The Quants back in 1990). Hedge funds, of course, are constantly attacked by the establishment, because they represent what every government hates - people not only able intellectually to judge their actions, basing such judgements on reality, but to then take action to execute that judgement. When the British decided to follow stupid policy and were shorted the hell out of by Soros, they called him indecent and vile and motivated only by profit. A similar thing is happening with those shorting the Euro, or financial institutions - when they buy, they are "welcome participants in the global economy" but when they sell, they are "evil speculators". Many have suggested that one should look out for people calling wolf by accusing speculators; it is usually followed by a swift demise, as was the case with Greece who assured everybody its debt situation was fine even as their ship was sinking.

However, I must address your other two points.

First, on the short term versus long term fallacy. This is one often advanced by two kinds of people.

The first are management, who would like to excuse their poor performance by blaming speculators. People like Steve Jobs or the Google co-founders have shown that it is very possible to ignore speculators, that strong leadership is possible even with Wall Street breathing down your neck. Similarly, a private equity shop usually has between 4-7 years to turnaround a business. They do so under extreme pressure, with enormous debt on their balance sheet making the slightest mistake deadly. They cannot stand still and must take risks. The outsized returns of (a part of) the private equity industry are testimony of what happens when you make management move their ***. On that subject, I particularly recommend Orit Gadiesh's short, but extremely insightful "Lessons from Private Equity". A shorter version of the argument: http://www.youtube.com/watch?v=7upG01-XWbY (this is not an endorsement of Gekko's methods, however; but his point about Teldar's management earlier in the speech is extremely valid)

The second are governments. Governments benefit from inefficient markets. For example, the Obama administration, whilst trying to "save" the banks, found itself inconvenienced with their rapidly declining share price, so it simply banned short-selling. Alas, it could not ban selling and soon prices plummeted as markets absorbed this new information so generously given by the government. Most recently, Michel Barnier argued ( http://online.wsj.com/article/SB1000142405...1192847930.html ) that accounting used to be less transparent, again to stop speculators and "stabilize" markets (i.e. make it easier for his kind to manipulate them to achieve the political goals he desires). These guys always go for the long term thing.

I will add a category of people, those who will definitely not benefit from added market efficiency. If you read Marc Rich's biography (Marc Rich was the man who created, put together and implemented the oil spot market - which allows you to get a different price at the pump every day, closely following global oil prices), he faced enormous resistance from the few oil companies that controlled the oil trade, and that enjoyed large premiums as a result. They called him short-term focused, arguing that they needed the premiums to invest in equipment etc. (an argument since then proven fallacious). He kicked the anthill.

Truth is, if you have an edge, you are making money. And value does not appear out of nowhere. You are not taking somebody else's lunch. Every single profitable trader is adding value (late 90s American derivs sold to Asians notwithstanding, although you could argue they were teaching the Asians the lesson you are arguing above will be taught in an unregulated market). Let's take the example of the shortest term trading style ever, the high frequency trading servers that are placed near the Exchange and capture trades in the interval of 30 milliseconds before they are shipped out to the market. These guys will literally buy and sell on the spot. What value do they add? Well, the seller gets his order filled 30 milliseconds earlier. That does not sound like much but it is actually a substantial increase in efficiency, especially since the exchange charges you money for shipping the order out, money not charged if it is filled on the spot. Of course, those computers cost a HELL of a lot of money, so only the best, richest prop trading groups can afford to have some there. But the value created is substantial enough that putting this strategy forward makes hundreds of millions.

At the end of the day, it takes long and short term investors to make markets efficient. You need those like Philip Fisher who will invest in long term high payoff things like small innovative companies (the pharma industry is actually one of the biggest innovation drivers in the world because their business model IS venture capital); but you also need Morgan Stanley's high frequency trading group, or Phibro's commodities trading, in order to make sure prices most closely follow reality. I will close that part of the argument by pointing out that S. A. Cohen (SAC Capital) has only had one down year in his entire career, 2008 (because he went into a particular market too deeply; and he immediately cut his exposure) - his yearly average is close to 35% per annum AFTER FEES which is extraordinary. This man changes the strategy make-up of SAC literally every week or month. He is the ultimate short term investor, but he is also honest and extracts value from markets the old fashioned way, by having an extremely strong edge both in mind and in his information network (all legal - see "Inside the Shark Tank of SAC Capital"). I cannot tell you the number of "value" investors, on the other hand, who regularly waste clients' capital by investing in bad businesses that are cheap for a reason.

The long term/short term argument is also heard in a different form, that of leverage. People always call out leverage as being bad these days. But leverage is extremely useful. There is no ideal leverage ratio. FX traders might use anything from 10-200x, necessary to amplify tiny fluctuations. Investment banks went under because they were 30-40x levered. The Baupost Group with its extremely high returns barely uses 1.5x at most (and often is 50%+ in cash equivalents). Private equity levers up firms by 5-15x, sometimes more. How can a government official come in and say leverage is bad? Every strategy uses a different amount!

As for your final point, I agree that bubbles these days are more likely to be created by government intervention (both seeding, such as lending to those who cannot pay back; and implicit, such as the Greenspan Put) than they are by the exuberance and folly of trading sheep. My point was more one that the standard argument advanced in the favour of truly free markets' ability to simply remove all bubbles does not hold; bubbles will always be there. They'll just be much smaller (although still substantial, otherwise they'd be fluctuations as you mentioned) and impact us a lot less. And we'll probably get rid of credit expansion bubbles (junk bonds, and the recent ones being the ones that stick out most, but most bubbles have some form of credit expansion attached) by getting rid of implicit insurance from the government to financial institutions. Who was the highest paid CEO on Wall Street this year? Bob Diamond. Barclays Capital. This is the British bank that refused government funds when in the lows, preferring to obtain capital at 3x the cost from sovereign wealth funds. Result: they have conquered Wall Street and the City so fast Diamond will earn $95m this year. As a comparison, at the height of the boom, Lloyd Blankfein, the Goldman Sachs CEO, only pulled $54m.

I should add that my gym analogy was not entirely accurate. The reason clients will shift from the other man's gym to yours is that they will not obtain results by doing 10 minutes of volume training a week; it has less to do with them analyzing both your and the other guy's methods. The same applies to the premium investment management industry, that of hedge funds; even very reputed hedge fund managers such as Peter Thiel get redemptions (clients pulling capital) when they are unable to produce positive returns. As for mutual funds, I would much rather invest my own money myself.

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Rtg24,

I think you missed my point as I am not against short term nor long term profits and I am totally for speculators. My mention of short-term in my earlier post was attempting to show that looters, people lacking integrity, are for the most part only focused on the short-term. But this same type of person wants an unearned reputation equal to the integral person that takes a long time perspective by consistently earning short-term and long-term profits on their investments.

Now back to what people call "bubble's" of which I still choose not to call them. When stock prices go up, and it is not caused by government intervention, it is usally the real "market players" that are correctly pricing those stocks in accordance to an increase in productivity, or an expectation of an increase, in those companies of which the stock is increasing in value. When these type of rational increases in stock prices happens the government usually steps in and creates the problem under discussion that being the so called "bubble" bursting. Governments usually do a couple of things that cause this so called "bubble" to burst, they either raise taxes on investments or increase the regulation on this field by putting restrictions on transactions. The government also does another thing, raise interest rates which slows growth of companines and also reduces valuations of stocks. When interest rates are low it shows a "long-term" perspective as expectations of growth and profits are high and people are willing to pay an increased amount for a return on their investment.

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Rtg24,

I think you missed my point as I am not against short term nor long term profits and I am totally for speculators. My mention of short-term in my earlier post was attempting to show that looters, people lacking integrity, are for the most part only focused on the short-term. But this same type of person wants an unearned reputation equal to the integral person that takes a long time perspective by consistently earning short-term and long-term profits on their investments.

In that case I agree. The fraudster's plan is usually to cash it in and run. Madoff being a strange exception.

Now back to what people call "bubble's" of which I still choose not to call them. When stock prices go up, and it is not caused by government intervention, it is usally the real "market players" that are correctly pricing those stocks in accordance to an increase in productivity, or an expectation of an increase, in those companies of which the stock is increasing in value. When these type of rational increases in stock prices happens the government usually steps in and creates the problem under discussion that being the so called "bubble" bursting. Governments usually do a couple of things that cause this so called "bubble" to burst, they either raise taxes on investments or increase the regulation on this field by putting restrictions on transactions. The government also does another thing, raise interest rates which slows growth of companines and also reduces valuations of stocks. When interest rates are low it shows a "long-term" perspective as expectations of growth and profits are high and people are willing to pay an increased amount for a return on their investment.

Yes and no. Internet stocks, for example, proved to be a good idea in the long term. Some, anyway. But everything internet was picked on, and it was not because of expected increased productivity, it was because people were trying to time a market bubble and get out before it all broke apart. The government did a few things to get in the way but by and large internet and technology businesses are one of the rare industries in the US which have not yet been intervened in (mainly because the government really does not understand the internet and venture capital industry enough to be able to regulate anything inside it, although the looters have spotted the increased bank accounts of VCs and are suitably sharpening their populist knives).

As for interest rates, if you really must have a central bank controlling the supply of money, then I would argue it is better to keep rates high as Volcker did in the 80s. Low interest rates stem from the Keynesian idea that created money is worth just as much as earned money (see: Where Keynes went wrong by Hunter Lewis). Keynes wanted interest rates to be zero as he considered savers to be stingy by lending their cash at "extortionate" rates. He considered it perfectly fair to diminish the value of savings by printing money (although he worded it differently).

High interest rates mean lending to people who need to be productive with the money, and reducing the amount of leverage that people can take on. It naturally forces investors to be wiser with their cash. Can't lever up 30x on NINA loans at 2% pa. I would say high interest rates are more productive in the long run and definitely less inflationary. Remember money is "printed" when the Fed lends - most of the printing is electronic and consists of expanding the credit base.

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