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Bubble Spotting

NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?

I don’t know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.

Big speculative bubbles are rare events. (Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.) And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.

But some places appear a little more likely than others to give rise to bubbles. The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles. There have been three colossal stock-market bubbles in the last century: the 1920’s, the 1960’s, and the 1990’s. In contrast, there has been only one such bubble in the United States’ housing market in the last hundred years, that of the 2000’s.